Global economic outlook in 2022 (1)

The global crisis has changed the priorities of policymakers, consolidated the balance sheets of households and enterprises, and embedded innovation. This should be a good idea. The economic growth in the 1920s was stronger than that in the 1960s.

Now that the state of emergency has passed, the goal of financial support is a new goal. Biden's physical and human infrastructure bill plans to allocate trillions of dollars in infrastructure spending, high-speed internet systems and clean energy, and fund other priorities such as child care and medical care. After Latin America almost exhausted the fiscal space to deal with the crisis, governments are usually in fiscal austerity mode. In the case of increasing inflationary pressure, monetary policy is also tightening.

The European Union Recovery Act and the Green Act in Europe, the Middle East and Africa focus on research and innovation, digitalization, modernization and recovery, and set positive standards for solving and dealing with climate problems. Asian countries in Asia have different financial support. Many developing economies have fiscal space, while developed economies have implemented large-scale fiscal easing policies. As the biggest growth driver in the region, XX seems to be tightening its policies to rebalance the economy and real estate.

With fiscal stimulus likely to exceed its peak, long-term spending proposals for infrastructure and other projects are now the focus.

Data up to 202 1, 10, 1. Area based on JPMC location.

In many ways, the 20 19 coronavirus disease is more like a war or natural disaster than an economic recession, and policy makers have reacted strongly to it. Globally, the total expenditure commitment after the epidemic is close to $20 trillion, which is the highest level of fiscal expenditure relative to GDP since World War II.

United States of America

In the United States, Congress and the White House have spent more than 4 trillion dollars to deal with the epidemic, and now politicians are discussing spending another 2 trillion dollars in the next 10 year. If the ambitious agenda of President Joe Biden is partially implemented, it will have important economic consequences. As written in this article, Biden's "Rebuilding Better" agenda will stimulate spending on physical infrastructure and technology research and development (such as robotics, artificial intelligence and biotechnology), subsidize domestic semiconductor manufacturing, and support the development of clean technology. Other measures for education, child care and supply chain can bring some positive long-term economic benefits.

Higher taxes will cover some of the costs of these policies. The personal tax rate of high-income families may rise, which makes asset structure and planning more critical. Although the statutory corporate tax rate may remain unchanged, changes in the global intangible income tax and the minimum corporate tax rate may drag down income. However, the change in corporate tax may not be enough to offset the expected sales and revenue growth in operating leverage. We don't expect higher taxes to reduce business investment.

In order to cope with the flu epidemic in the next 10 year, Congress will spend a lot of money to debate the expenditure in the White House, while Europe is still a powerful force-we think fiscal stimulus will play a role, which is in sharp contrast to the early 20th century 10 year, when fiscal austerity damaged the already weak economy.

After the global financial crisis, the actual output never recovered to the potential level (theoretical long-term GDP). Now, the EU has agreed to invest more than 2 trillion euros in post-pandemic reconstruction by 2027. Key areas of the EU include digital innovation, research, climate-focused spending and epidemic preparedness plans. Offset costs: financial transaction tax, digital tax and the company's "financial contribution" to be levied. Nevertheless, we believe that these expenditures will have a positive net impact on the economy and the market.

Europe's strict fiscal rules have been suspended for two years, and it seems that permanent changes are possible. When the borrowing cost is negative, there seems to be no economic reason to maintain a balanced budget. However, the continuous support of the European Central Bank seems to be crucial to help peripheral countries keep their borrowing costs under control. Although the structural problems related to monetary union still exist, this epidemic has led to a more integrated European continent and a more market-oriented fiscal policy stance. ? The fiscal deficit in the euro zone as a percentage of GDP (a measure of financial support for the economy) is still higher than the peak of the global financial crisis, although this time the growth rebounded faster. Although the fiscal deficit will be reduced, it shows that the financial situation is more favorable than before.

The transformation of these two central banks should support the market in 2022 and beyond.

Elsewhere, central banks are moving in different directions. Central banks in developed markets such as Norway, New Zealand, Canada and Britain have taken measures to tighten monetary policy. Although different policy paths may lead to tactical opportunities across regions and money markets, the Federal Reserve and the European Central Bank (and the People's Bank of XX) may be the most important global risk assets.

In emerging markets, the policy stance is obviously not very supportive of investors.

Policy makers in XX have been trying to rebalance the growth momentum and adjust the economic structure. Their efforts include re-tightening the real estate industry, rapidly changing internet regulation, ambitious climate change targets, and new social movements on inequality and family values. Policymakers pursuing long-term reforms and priorities have been willing to sacrifice short-term growth. In the medium term, investors may have to accept the impact of the structural slowdown in XX years. This state may be more sustainable, but this transition will bring short-term risks.

In Latin America, the potential shift to populism may bring serious negative economic impact to the region.

So far, the recent election results have been mixed, because social dissatisfaction with the government's handling of the flu epidemic and the ensuing economic crisis is growing. Some countries, such as Chile, voted against the populist alternative, while others, such as Peru, voted for it.

Left-wing candidates lead in preliminary polls before key presidential elections scheduled for 2022 by regional authorities such as Brazil and Colombia. People are increasingly worried that the uncertainty of the election may have a negative impact on consumption and investment.

The net assets of healthy enterprises and consumers' families are at a historical high, the solvency is at a historical low, and consumer confidence has room for recovery. Throughout the developed countries, household savings are increasing. American consumers saved nearly $2 billion. It is 5 trillion higher than the trend before the epidemic. This is in stark contrast to the experience after the global financial crisis, when falling house prices and falling stock prices damaged family wealth.

The net assets of the top quarter and top 20% of healthy enterprises are growing at an alarming rate. February 20 19 to mid-2002 17 trillion USD. Even so, the wealth and income of the middle class are much richer.

The net income wealth of the 20th-80th percentile has increased by more than 6 trillion dollars, and the ratio of liabilities to assets is at the lowest level since the early 1990s.

Healthy enterprises and consumers have ample employment opportunities, and employers pay extra fees to attract workers.

The withdrawal rate in the United States is at the highest level in history since 2000, which shows that the demand for labor is strong. When people are confident to find another job, they usually quit. Overall, wages increased by 4-5% year-on-year, which is the strongest growth rate since the mid-2000 s and the highest proportion of small enterprises planning to raise wages since records began. Importantly, wages at the lowest income level increase the fastest.

This seems to be a global trend. For example, in Britain, the vacancy rate of each position has reached an all-time high. In a word, since the 1990s, workers have the greatest labor pricing power. Although there is reason to believe that the current wage growth rate will slow down, it may run at a healthier speed than in the post-global financial crisis period.

Wages have increased by 4-5%, which is the highest level since the mid-2000s? In view of this, we expect consumers in developed countries to promote demand and economic growth next year and beyond.

Industries that fell behind in the recovery process of the financial crisis, such as housing and automobiles, may be in a leading position in the current cycle. Today's American housing stock can't meet the demand. House prices have gone up, but low mortgage interest rates and rising incomes have made housing affordable. ? The shift to a more flexible work plan should allow people to move from cities and nearby suburbs to relatively cheap suburbs and outer suburbs. At the same time, innovations in the automotive industry, including electrification and assisted driving, may lead to an extended upgrade cycle in the United States and around the world.

According to the housing affordability index of the National Association of Realtors (adjusted according to the median income and the interest rate of unpaid mortgage), the affordability of self-occupied housing is higher than at any time from 2000 to 20 10.

As far as enterprises are concerned, healthy enterprises and consumers are equally impressive.

Earnings and profit margins are at historical highs, investment-grade credit spreads are at historical lows, and demand is strong. In developed countries, the financial sector seems to be sound and willing to lend. Standard & Poor's 500 index companies will increase the global economy by 6%, increase sales by 15% and increase profits by 202 1. This kind of operating leverage surprised investors and caused the index price to rise by about 25%.

The profit results in Europe are more significant (albeit from a lower base). 10% sales growth has brought about 64% revenue growth in this region. Since 20 18, European stock markets have been synchronized with American stock markets in local currency for the first time. Although we expect a slowdown in 2022, there is still room for unexpected gains.

Continuous innovation The global economy has become more digital. Medical innovation has provided a powerful vaccine at an alarming rate. Policymakers and businesses remain committed to investing in climate change mitigation.

We believe that these trends will continue to promote R&D, investment and value creation.

In recent years, there have been innovations in the fields of e-commerce, technical hardware and cloud computing. E-commerce expenditure is 20% higher than before the epidemic, and global cloud computing security expenditure increased by 40% in 20021year. Everyone benefits from the fact that people spend more time online. ? In the next few years, we expect that the digital transformation of the economy will continue to develop rapidly: the automation of commodity production and service industry may be improved, which may be due to the shortage of labor market. Artificial intelligence and machine learning will continue to support new technologies such as voice assistants and autonomous driving.

Another example: the real reason for the shortage of semiconductors is the surge in consumer demand for goods. Now almost everything has semiconductors! In the digitalization of the automobile industry, the electrification of the global fleet will become a powerful force in many aspects.

One data point tells us that the semiconductor content of electric vehicles is at least four times that of traditional internal combustion engines.

In addition to automobiles, digital transformation is becoming more and more common in the fields of finance (payment and blockchain), retail (augmented reality), entertainment (preference algorithm) and medical care (predictive medicine driven by artificial intelligence). Metauniverse can digitize most people's lives, whether good or bad.

Cloud computing continues to accelerate. Before the epidemic, 20%-30% of the work was done in the cloud. Executives believe that it will take 65,438+00 years to grow to 80%. Now, only three are needed. Encrypted assets may be an interesting long-term opportunity for some investors in a larger goal-based portfolio.

Medical Innovation In the medical field, researchers are looking for whether the mRNA technology behind powerful vaccines can be used to treat other diseases.

With the acceleration of medical innovation, we believe that the industry may become more personalized and pay more attention to preventive health care and digitalization. Wearable devices, telemedicine and gene editing are other investment opportunities worthy of attention.

Continued policy support from the United States, Europe and XX, as well as more frequent and destructive natural disasters, are attracting people's attention to the demand for sustainable investment.

It is estimated that the decarburization of the global economy will cost 4-6 trillion US dollars every year in this decade. In order to achieve President Biden's goal of decarbonizing the power grid by 2035, the United States needs to invest 90 billion US dollars each year to increase wind and solar power generation capacity. Despite the comprehensive assessment, we still see opportunities for clean technologies such as carbon capture, battery storage, renewable energy and energy efficiency. Circular economy and agricultural technology are also key areas. The carbon offset market may also provide opportunities for tactical investors.

The key problem is to monitor the cross current.

Although we see the obvious potential of a more dynamic economic cycle, the environment is also full of cross-flows.

We believe that economic expansion will continue until 2022, but its intensity may depend on the future monetary response to inflation, the relative success of XX, the efforts made by policy makers to rebalance their economy, and the speed of transition from epidemic diseases to endemic diseases.

Inflation and monetary policy Now the market shows that it will take off in the middle of next year, and the short-term interest rate will be close to 1% by the end of the year.

Preventing inflation is the key to achieving long-term goals. In 2022, you can build a portfolio to identify and mitigate inflation risks.

We expect more patience on the issue of raising interest rates. The moderate inflation background (our basic view) should leave some room for the Fed to wait for the labor market to recover more completely from the trend before the epidemic.

202 1, the high core inflation in the United States (excluding food and energy) is driven by the surge in demand for commodities. Supply chain is under pressure. In recent years, they have adapted to the long-term tepid economic activities, sluggish demand and the uncertainty of US-China trade tensions.

However, the actual expenditure of commodities today is higher than that of the previous period 15%. With the interruption of coronavirus disease in 20 19, especially considering the interruption of the strict containment policy of coronavirus pneumonia-19, the import volume of XX and other Asian regions surged, but the supply and demand did not match. This has also led to the shortage of semiconductors, which has aggravated the soaring price of the automobile industry. In fact, in 20021year, 30% of the increase in consumer prices in the United States was driven by cars, although this sector only accounted for 7% of the consumer consumption basket.

Inflation and monetary policy We expect that the rise in commodity prices will be temporary. As the epidemic subsides, consumers should shift their spending from commodities to services. Supply chain pressure should be eased. Although foreign direct investment has collapsed, trade and portfolio flows show that the long-term power of globalization to control commodity inflation in the past 20 years is unlikely to be completely reversed.

However, there are signs that the price increase is expanding. For example, as an important and intractable component, housing inflation is on the rise. In addition, wage growth has been very strong, which should be supported by the continuous progress of the labor market towards maximum employment.

Inflation and monetary policy, but the labor market has been a puzzle for economists and strategists for a year.

The American economy still lacks 5.5 million workers, and the unemployment rate exceeds 4.5%. These data show that the labor supply is sufficient. However, survey data and other indicators show that it is very difficult for enterprises to recruit employees, which shows that the labor market has quickly lost its vitality.

Although inflationary pressure is spreading in the global economy, the employment dynamics are not unique to the United States. In many developed markets, job vacancies have increased, especially in the high-contact leisure and hotel industries. For example, in Britain, leisure and hotel industries are more than twice as likely to face labor shortage as other industries. The outbreak of 20 19 coronavirus disease in Vietnam and other countries led to the shortage of labor in big cities. The global epidemic is affecting the labor dynamics in the global market.

Despite the population pressure (during the flu epidemic, about 6.5438+0.5 million workers in the United States retired early), we expect that the labor supply in the United States will increase with the reduction of health risks. In addition, about 2.7 million workers who receive extra unemployment benefits are richer than those who work, and they may also look for jobs in the coming months. Strong wage growth should attract some working-age people who have dropped out of the labor force to rejoin. Generally speaking, we think it is more appropriate to use "labor shortage" to describe the dislocation between existing jobs, wages paid and the willingness and ability of part-time workers to accept these jobs. As time goes on, this dynamic should return to balance.

Inflation and monetary policy in the euro zone, although the unemployment rate remains high, the extensive use of short-term jobs means that the overall decline of the labor force is not as serious as that in the United States. Therefore, wage growth is slow, and this development should help maintain the patience of the European Central Bank. In the medium term, as the labor market continues to recover, we expect wages in Europe to grow healthily.

During the flu epidemic, wages rose faster than the prices of goods and services, and we found little evidence that rising costs led to a decline in profit margins. The risk in our future is that the inflation of core commodities remains high, or the employment-population ratio will never fully recover. This means that the economy has indeed come out of the depression, which may lead the Federal Reserve to make a positive response in 2022. This may cause serious damage to the economy and risky assets.

Now, the growth has obviously slowed down.

After policymakers tightened monetary and fiscal policies to curb excessive behavior in the real estate market and crack down on digital consumption, the year-on-year GDP growth rate in XX fell below 5% for the first time. In exchange for slower nominal growth, policymakers expect middle-class consumption and high value-added manufacturing to promote a more sustainable economy. At the same time, the pursuit of a wide range of macro and industrial policies increases the difficulty of policy implementation and brings downside risks to growth and the market.

The transformation of XX economic balance method has had a serious impact on economy and market.

Bonds of stressed real estate developers are traded at 20-30 cents, and the market value of Internet companies has shrunk by half. Alibaba's valuation alone has dropped by more than $400 billion from its peak level. The for-profit education sector has virtually ceased to exist. The weak XX economy mainly affects the global economy through trade. XX real estate industry is one of the biggest sources of global industrial commodity demand. Obviously, this slowdown has had an impact on global commodity producers.

XX's economic stimulus measures are weak, aiming at controlling excess net new credit, such as% 6 months' net new credit of GDP.

At this point, many people are debating whether XX can invest.

We think this is a wrong question. If the potential return is considered to be worth the risk, then everything can be invested at the right price.

Opportunities can be found, but investors need to consider all aspects of XX assets and related risks. Also remember that although most central banks are either raising interest rates or discussing when to raise interest rates, XX policymakers may be closer to relaxation. This development may bring interesting diversified income of XX bonds, especially considering the challenging prospect of fixed income in developed countries.

The different characteristics of offshore and onshore indices are very important. The offshore stock index (MSCIXX) is mainly composed of technology and Internet companies, and is mainly held by foreign investors. The onshore stock index (CSI300) is evenly distributed in various industries and is mainly held by domestic investors.

At this point, the latter seems to be more attractive to us.

In the short term, the uncertainty about the impact of current and future regulations on profit margins and earnings growth may put pressure on offshore stocks, as investors are trying to value these companies. However, the onshore market includes many clean energy, electric vehicle (EV) and semiconductor companies, which can benefit from government policy support.

Although the spread path of coronavirus has proved to be unpredictable, investors can now calmly deal with the uncertainty.

The bad news is that coronavirus pneumonia-19 seems likely to become endemic; Humans will have to continue to adapt to it. The good news is that vaccination, immunity to previous infections and new treatments have all reduced the risks associated with the spread of the disease.

At present, the 20 19 coronavirus vaccination plan has been completed, and 42% of developed countries have begun to distribute vaccines. Most estimates show that more than 65% countries in the world have some form of virus protection measures, whether it is vaccination or prior contact.

However, more 20 19 coronavirus disease outbreaks may be due to new mutations. To understand how the market may react, let's take a look at the experience of the United States in the delta wave: cases of unexpected rise hit the stocks of companies related to liquidity (such as airlines) and oil prices. Logic: The wider the spread of CVID- 19, the less likely it is to travel, so the demand for oil drops.

From epidemic diseases to endemic diseases, a more complicated consideration for investors is the extent to which some countries pursue the "zero COVID-19" policy.

The longer they do this, the greater the potential damage to manufacturing output and global supply chains. In the third quarter, Nike, Toyota and other companies said that there was a supply problem due to the blockade in Vietnam and other places. On one occasion, as many as 50% clothing and footwear manufacturers in the country closed down. The closure of XX port further disrupted global shipping.

More broadly, due to the interruption of global supply chain, the increase of virus cases aggravated the interruption of supply chain, and the economic growth forecast of annualized GDP in the third quarter of the United States plummeted from 6% to 2% in the whole quarter. The operating conditions in East Asia (especially in XX, Australia and Vietnam) have further deteriorated.

From epidemic to endemic diseases, bond yields have been falling until the Delta wave significantly exceeds the peak in the United States. In the stock market, the market with large market value oriented by numbers performs better than those industries that are more closely related to economic output.

But in the end, the Delta wave actually had little impact on American or European stock markets: the S&P 500 index hit 28 new highs, followed by the Stoxx Europe 600 index. Recently, the increase of vaccine penetration rate has obviously improved the production and operation in Hanoi and other places, and there are preliminary signs that the global supply chain problems have begun to ease.

S&P 500 hit a new high in delta volatility? The core of our outlook is that in this economic cycle, the global economy will be more dynamic than the previous one.

Holding cash for short-term expenses and as a psychological safety net against fluctuations. But as a strategic investment, strategic cash is our least favorite asset class.

The economic policies of the United States, Europe and XX aim to promote more sustained and high-quality growth within the income range, even if the relative success opportunities in different regions are different. Households and businesses in the United States and Europe have healthy balance sheets and strong demand for their goods, services and labor. Innovation is promoting structural changes in various industries and may increase the productivity of the global economy.

These forces have an important investment impact, especially for long-term investors, who may still be in the economic downturn at the end of 20 10.

In 2022, as the American and European economies further enter the medium-term cycle, we expect a strong growth environment, characterized by a higher inflation rate than investors saw in the last cycle. Although the stage of the cycle may vary from region to region, these conditions bode well for global stock markets, especially relative to core fixed income. Since the volatility of stocks and fixed income may continue to rise, dynamic active management may increase value. After adjusting for inflation, the expected rate of return on cash is still negative; It is still our least favorite asset class.

Stocks No, stocks are not undervalued. For most major markets, they can only be fully valued at best, but investors have paid a premium for excellent earnings growth and free cash flow creation.

In most areas of our report, we are more optimistic about the profit growth next year than the general view, except XX. Compared with emerging markets, we prefer developed markets, but we pay more attention to the quality of potential business drivers and revenue sources rather than jurisdiction. Some investors worry that profit margins will deteriorate. We believe that the increase in prices and productivity will offset the increase in input and labor costs.

In fact, we believe that we are indeed in the "growth" stage of the market cycle. At this stage, income growth promotes the return of the stock market, and stock pickers can make profits.

Importantly, we expect returns to be distributed more evenly among departments and companies, rather than focusing only on the biggest participants with the strongest long-term tailwind. Considering the dynamics of the last cycle, imbalances in the portfolio may have accumulated. What will continue to be important is the balance between long-term and long-term growth companies that trade at "reasonable" prices and companies that benefit from the short-term advantages of the real economy. Therefore, technology and finance are our two favorite fields. They are portfolio diversification, because they react in the opposite direction to changes in interest rates, and both sectors should be driven by strong income growth. As we further enter the medium term, active managers should be able to increase the value of the stock portfolio.

Private investment For many investors, the private market is an untapped opportunity set.

The private market may be a particularly attractive hunting ground for investments related to the megatrends we have identified (digital transformation, medical innovation and sustainable development). For example, among the more than 654.38 million software companies in the world, 97% are private companies. Small private biotechnology companies are increasingly becoming an important source of innovation for large pharmaceutical companies. Only 30% of the top listed drugs of large pharmaceutical companies are developed internally. We expect the private market to get higher returns than the public market, in part because these growth drivers can be obtained.

Given that historically low bond yields may continue to rise, while inflation is still rising, core fixed income faces a challenging prospect.

Investors are faced with a double challenge: finding the rate of return and preventing potential stock fluctuations, while surpassing inflation.

Core bonds are still a key component of portfolio construction. Although low interest rates have eliminated some capital appreciation that may occur during the recession, asset classes still provide protection against negative growth. However, since this year, we have advocated the use of flexible active managers (whether in fixed income or across asset classes), who can dynamically adjust their investment portfolios according to changing market conditions to help supplement core fixed income. This is a 202 1 strategy, and the combination of 2022 should continue to increase.

What needs to be clear is that this year we are more active in core fixed income than last year. Although the interest rate is low, in the past year, the interest rate has risen sharply, gradually approaching the level where bonds can provide more competitive risk-adjusted returns than stocks. For American investors, especially those in high-tax states, municipal bonds now look more attractive because yields are rising.

In the short term, the expectation that the Fed will raise interest rates is getting stronger and stronger, which gives investors the opportunity to get rid of cash and buy short-term bonds instead.

The valuation of high-yield bonds is unconvincing (the yield is relatively low and the spread is small), but there is good reason: the high yield of 202 1 is the lowest on record.

However, we suggest relying on expanding other parts of credit, such as leveraged loans, mixed securities and private credit, to increase the income of new capital. Investors can also consider bank preferred shares because the United States has a strong capital buffer and preferential tax treatment.

For investors seeking inflation protection, we don't think treasury bonds, inflation protection securities or gold are good choices at present. On the contrary, we like to rely on assets whose cash flow is linked to inflation, such as stocks with pricing power, direct real estate and infrastructure.

Generally speaking, a diversified investment portfolio can still achieve investors' goals, but it needs careful design and management.