What is the key risk in financial markets that you are keeping an eye on most at the moment?
The three most common predictions outlined in our article “What’s in store for your 2022? – predictions bingo card” were that (1) interest rates will go up, (2) there will be increased volatility, and (3) inflation slowly eases off. In the latest Global Strategy update from Magellan, Hamish Douglass explains that Omicron is heightening the risk of inflation. This is due to the potential supply chain disruptions through parts of South East Asia due to zero-covid policies in places such as China. It is possible that the world may be moving through Omicron just as China locks down cities to suppress the virus. Workers around the world are being taken out by Omicron, case in point if you wonder why those shelves are empty at your local supermarket.
If central banks are forced to tighten monetary policy to stamp out inflation, then financial markets will come under serious pressure. Douglass suggests that if inflation doesn’t roll over by the middle of the year, then central banks are currently in the wrong position. Small increases in interest rates through 2021 already caused stock prices of several unprofitable businesses to plummet.
“At the end of the day a company is only worth the discounted value of all future cash flows.”
The challenge for investment managers will be identifying which businesses can endure tighter financial conditions through 2022 and beyond.
Watch the Global Strategy update here for further insights : Global Strategy Update – January 2022 – Magellan Financial Group
Access the full Qualitative Fund Research reports on the Magellan Global Fund and Magellan Infrastructure Fund here
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