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December 2021 - Monthly House Views

Recovery To Continue into New Year

Strong recovery to continue in advanced economies.

Growth will probably be lower after this year's rebound but should remain dynamic. Company and household finances look strong and built-up savings should keep consumption ticking over. Monetary and financial conditions are also helpful, with real interest rates still clearly negative. Prices remain under upward pressure from base effects, supply chain tensions and labour supply inelasticity, but these all should gradually decline allowing inflation to ease back in the New Year; though it is likely to exceed central bank targets for some months yet. Another COVID wave could pose a threat to mobility, but greater vaccine take-up and new treatments should limit its reach.

A higher-growth environment will bring higher inflation – albeit mostly short-lived – prompting central banks in several countries to shift to a restrictive monetary policy stance.

The Federal Reserve (Fed) will likely continue tapering its asset purchase programme and will start hiking rates in 2022,  despite this, compared to its long-term history the monetary policy in context remains exceptionally loose. The European Central Bank (ECB), meanwhile, will likely stick to its highly accommodative policy as Eurozone inflation remains more modest. Although rate hike expectations at the next meeting have reduced for the Bank of England, we are still likely to see interest rates increasing at some point in the next few months to regain credibility following confusing policy messages.  

We are moderately risk-on with a continued preference for equities in most strategies.

We believe the case for risk-taking is well supported given a robust strong economic backdrop and continued positive momentum for risk assets. Nonetheless, we are wary of expensive valuations and risks from factors such as the Omicron variant, stubbornly high inflation, the potential for central bank policy errors and Chinese real estate contagion. Therefore, we continue to hold a stable of safe-haven assets including cash, government bonds, gold, and defensive alternatives (e.g. low-volatility hedge funds, Tail Risk Protection Note).

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