- Near-term recovery is expected to continue while the pandemic “rages”
What the world looks like
The world has not been the same since March 2020.
Most of the countries of the world are starting to come out of the Covid pandemic induced recession. The International Monetary Fund (IMF) published its outlook for 2022 in a document titled World Economic Outlook which is themed “Recovery During a Pandemic Health Concerns, Supply Disruptions, and Price Pressures”.
Reading this document leaves little doubt in the mind that Covid is still a part of our everyday lives and will remain so for the foreseeable future.
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The multilateral institution expects that in the near-term recovery is expected to continue while the pandemic “rages” the document reads. Employment growth is expected to be slower than the recovery of output in most countries. High inflation and uncertainty are expected to remain as new variants threaten the resilience of the recovery the document goes on further to say.
The global recovery is being hampered by variants of the coronavirus most notably the Delta variant and recently the omicron variant both of which are said to be highly transmissible. The global death toll for Covid has risen to close to 5 million and health risks abound which delay the return to normalcy.
Pandemic outbreaks in critical links of global supply chains have resulted in prolonged supply disruptions fueling the growing inflationary trends in many of the countries of the world.
All these factors have led the IMF and other similar institutions to downgrade their global economic growth forecasts for 2022 from 5.9% to 4.9%. The outlook for income developing country groups has also darkened significantly due to worsening pandemic dynamics.
This comes as the IMF has downgraded economic prospects for countries in this cluster. The downgrades have, however, been offset relatively by projections for some commodity producers and exporters that were upgraded on the back of rising commodity prices.
The economic prospects between wealthy nations and low-income countries are expected to be divergent and this divergence will remain of great concern to multilateral lenders and world leaders. In wealthy nations, for example, aggregate output for the cluster economies is expected to regain its pre-pandemic trend path in 2022 and exceed it by 0.9% in 2024 whereas the cluster of nations comprise emerging markets and developing economies (excluding China) will remain 5.5% below their pre-pandemic forecasts in 2024.
This event should it occur as forecast will set back improvements in living standards.
These economic divergences are the result of large disparities in vaccine access and in policy support in the countries that require these vaccines.
Drilling down further into this phenomenon shows that almost 60% of the population in advanced economies is fully vaccinated and some are even receiving booster shots.
This compares starkly to the approximately 96% of the population in low-income countries which remains unvaccinated.
Emerging economies according to the IMF are perhaps ominously withdrawing policy support as a result of tighter financing conditions in those countries.
Supply chain challenges and disruptions are going to be reverberating themes in 2022. They have arisen from pandemic outbreaks and weather disruptions that have caused shortages of key inputs dragging manufacturing activity lower in many countries.
These same supply shortages and the rebound in commodity prices have resulted in consumer price inflation increasing rapidly in most countries notably the United States, Germany and most emerging markets and developing economies.
Consumer price inflation is especially sensitive in low-income countries because of its potential to lead to social unrest.
The IMF affirms that its foremost policy priority is therefore to vaccinate adequate numbers in every country. The chief economist of the IMF Dr. Gita Gopinath is on record for having said “…the pandemic is not over anywhere unless it is over everywhere…”
This will require G7 and G20 nations to fulfil dose donation pledges, to deliver these doses and to remove trade restrictions on the flow of vaccines and related inputs. Vaccine manufacturers and high-income countries are expected to and should support the expansion of regional production of vaccines in developing countries through financing and technology transfer solutions.
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Reducing the likelihood of a prolonged pandemic will remain a priority for global leaders. Another priority that is going to be thematic in 2022 is to slow the rise in global temperatures and maintain the growing adverse health and economic effects of climate change.
To this end, advanced countries will need to deliver on their earlier promises in terms of mobilizing US$ 100 billion of climate financing annually for developing nations.
Multilateral institutions are expected to make concerted efforts to reduce the economic divergences by ensuring the availability of adequate liquidity for constrained economies and more expeditious implementation of the G20 common framework to restructure unsustainable debt.
The fiscal space in most if not all countries that make up southern Africa is becoming more and more limited however, healthcare spending should continue to be a priority. Monetary policy will need to be balanced between tackling inflation and financial risks and supporting economic recovery, ideally.
In the wake of increased uncertainty regarding inflation, central banks should be prepared to act quickly if the risks of rising inflation expectations materialize.
It is noteworthy to mention that the Covid pandemic was to have a prolonged impact it could reduce global GDP by a cumulative US$5.3 trillion over the next 5 years according to the IMF. It is in every person’s interest to eradicate Covid through equitable distribution of the vaccines and to overcome vaccine hesitancy.
Where should investors be looking in 2022 and beyond?
Sentiments from multilateral institutions leave little doubt that going into 2022 the financial landscape will be characterized by rising inflation, inflation uncertainties, supply chain disruptions and increased climate change awareness.
All these dynamics have far-reaching implications for investors in terms of their portfolio construction and asset allocation decisions going forward. Where should the smart money go in 2022 and beyond?
Gold
This commodity is an asset class on its own. It has a long record of being regarded as a safe haven for its investors in times of uncertainty and more in times like these with inflation rearing its ugly head. Investors should consider adding some exposure to this asset class through participating in ETFs, gold equities and gold futures.
Commodities
This is a broad category of an asset class that includes grain, precious metals, electricity, oil, and natural gas. There are in vogue with their prices rising. The buoyant prices have provided much-needed cash windfalls for countries that produce and export these. Investors can appropriate these cash windfalls for their portfolios through ETFs, futures contracts, and share in companies that produce them.
Financial Assets
Whenever there is inflation in an economy, it is not advisable for investors to hold fixed income securities like corporate and treasury bonds as well as fixed-term deposits. These are generally not able to hold their own in inflationary periods. Equities on the other hand have been traditionally believed to provide returns that are ahead of inflation.
A conservative portfolio should comprise 60% in equities and 40% in bonds. However, in an inflationary environment investors should be overweight in equities and underweight in fixed income securities.
Real estate
Investing in this asset class is part of what is called the hard asset investment strategy. Investing in hard assets during inflationary periods is a winning strategy for investors because hard assets always hold their value against inflation. Property prices and rental income have been known to keep up with inflation.
They rise whenever inflation rises. There are many ways an individual can invest in real estate. They can do so through a direct purchase of brick and mortar structures in well selected and progressive locations or indirectly through ETFs, REITs and shares in property-owning companies.
In conclusion, savvy investors will not only look to preserve the value of their wealth and capital but will also grow it regardless of which direction the markets go especially in southern Africa.
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