Jerome Powell has been reappointed as Chairman of the US Federal Reserve (Fed), having being politically nobbled: facing the mid-term elections next November and vulnerable to his becoming a lame duck administration, President Biden clearly made it a condition of Powell’s continuation in office that the Fed should urgently give its undivided attention to the need to contain soaring inflation.

 

Markets will therefore be focusing on how the principal central banks (the Fed, the Bank of England and the European Central Bank) back-peddle in 2022 from their public positions hitherto of “all’s well, nothing to see, move along there, please!” to one in which monetary stimulus is unwound, first by tapering and then stopping their bond purchasing programmes (the shift from quantitative easing to quantitative tightening) and then progressing from the current situation of zero or negative interest rates to rates of interest more appropriate for dealing with inflationary pressures. Given quantitative easing and ultra-low interest rates have, to a greater or lesser extent, dominated the investment backdrop for all asset classes for more than a decade since the Global Financial Crisis, it is a delicate balancing act.

 

Covid isn’t finished with us yet

All of this will be set against 2022’s backdrop of societies and economies still managing their way through Covid, with all the disruption it has created and the effect it continues to have nearly two years since it first escaped a Wuhan wet market. Who would have thought a year ago, as effective vaccines were launched, that 12 months later at the time of writing, swathes of Europe would be reintroducing repressive lock-down measures and curtailments of freedom with all their knock-on effects? However, broadly, economic recovery is judged to continue in 2022. Following the near 10% collapse in the UK economy in 2020, the Bank of England is still confident that the UK economy will recover its December 2019 pre-pandemic level during the course of 2022.

UK inflation to fade and interest rates to top out at 1.1%? Time will tell…

Source: Bank of England, Monetary Policy Report, November 2021

Troublesome geopolitics to continue

Geopolitics are usually contextual to investors. But sometimes they are of direct interest and such a time is now. As the geopolitical tectonic plates shift, the western democracies showing signs of division, hesitancy and stress when facing the strategic threats posed by such nations as China, Russia, Iran and North Korea, the effect is real. Energy, data and migration have all been revealed as policy areas susceptible to being ‘weaponised’ for both political and geopolitical leverage. Russia blackmailing the EU and the Ukraine with gas supplies; the growing military and political tensions ranging from the Baltic to the Balkans; China’s new subtle but no less powerful ‘Resocialisation Revolution’; all have had a direct effect on investment markets, whether through share prices, term and risk premia in bonds, or currencies. There is every reason to assume that this will continue in 2022.

 

These are fascinating times for investors; we might have seen elements of today’s conditions before but none of us has ever seen them in their totality in our investment careers, however long they span. Opportunities are there to be taken, but new risks present themselves and must be managed or mitigated against. From an investment perspective, we believe it pays to be open-minded and adaptable rather than prescriptive and dogmatic. Aiming to keep up in the good times, trying to lose less in more challenging conditions, this is what we believe goes to the heart of compounding long-term wealth.

The value of active minds: independent thinking

 

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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