More jabs in emerging economies to mitigate risk outlook

A push towards boosting vaccination rates in emerging economies in early 2022 could help restore supply chains and revive businesses as inflation and the new Omicron variant continue to drive investor concern, according to AXA Investment Managers (AXA IM).

 Chris Iggo, Chief Investment Officer, Core Investments said the worrying number of emerging economies with vaccination rates below 50% will cause further impact on global trade and activity, as waves of the disease continue.

“If this doesn’t change, then there will be… a growing risk of stagflation which would be extremely negative for investment returns,” he said.

“In 2022, we need to see real progress on the rollout of jabs to achieve global immunity and a real and more equal expansion of global wealth.”

Iggo also said investors should look to hedge against inflation and rate hikes, as the latest US consumer prices index (CPI) forecast is likely to confirm inflation will no longer be considered as ‘transitory’.

“The current Bloomberg economists’ consensus forecast for the monthly change in the US consumer prices index for November is 0.7%. That would translate into a 6.8% year-on-year inflation rate and more or less ensure that US headline inflation will remain above 6% at the beginning of 2022,” he said.

“All being well, year-on-year inflation will head lower next year but it is likely to remain above at least 4% for most of the next twelve months.”

Iggo also highlighted the 30% difference in total return between the S&P Growth index and the US Treasury 10-year plus index, as market performance throughout 2021 reflected the global economy’s reflationary phase.

“There are plenty of defensive options if you are worried about 2022 being a less positive year. Floating rate-linked and short-duration fixed investment instruments have little downside risk even when they are heavily credit loaded such as asset-backed securities and CLOs.”

Iggo also advised investors to keep diversification, climate mitigation and managing carbon risk in mind for protection as they approach another time of uncertainty.

“While supply issues may subside, the energy transition could continue to provoke bouts of higher inflation,” he said.

“On the growth side, renewables and climate related technology and a broad exposure to digital trends will provide the longer-term growth. Regionally, Europe is less at risk from endemic inflation and monetary tightening than the US, and certainly on the equity side there is a valuation advantage in European stocks.”