Re-Syncing The Global Economy, Policy And Financial Markets – December 20, 2021

One of our core themes this year has been that the global authorities have forcefully divorced the policy cycle from the economic growth and inflation cycle. This anchored government bond yields in the major developed economies and subsidized risk taking, causing equities and other risk assets to front-run improving underlying fundamentals, in what can be called The Great Asset Inflation.

The global financial market outlook will be dictated by how this forced separation of the cycle is resolved. Last Thursday, we published a two-part report which focused on how this theme will evolve over the next year, and outlined our investment strategy for each of the major asset classes. Policymakers are beginning to capitulate, albeit in small steps and without any conviction that a significant policy tightening cycle will be needed to contain this year’s surge in inflation. We expect a more disruptive rate-hiking cycle than the Fed et al anticipate in 2022 and beyond, creating turbulence and opportunities in many markets and sectors.

The calmness in longer-term government bonds in the latter part of this year is set to give way to another upleg in yields. For equities, we expect greater volatility and lower overall returns, as well as a greater shift towards better-valued market laggards. The transition from growth to value stocks will be the front edge of this rotation and may already be underway. Investors will need to be selective, but maintain a bias towards value stocks, small caps, and select non-U.S. equity markets.


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