An abrupt repricing of interest rates is the single biggest risk to financial markets going into 2022, according to Janus Henderson.
Paul O’Connor, head of the multi-asset team at Janus Henderson, said interest rates were currently lower than they should be which meant markets could see a repricing in the future. There had also be a shift towards active use of fiscal policy during the pandemic.
Rates had been held at 0.1% in Australia since November 2020 and at 0% to 0.25% in the United States since March 2020. However, there was speculation that the Federal Reserve, which holds a meeting this week, could imminently raise rates in light of rising inflation.
O’Connor said: “Unusually low real interest rates played an important role in dampening the economic impact of the pandemic. However, it is questionable whether monetary policy should still be on such emergency settings, with growth booming and inflation at multi-decade highs in many major economies.
“If pandemic-related restrictions on economic activity recede next year and consumers start putting their excess savings to work, the risk is that financial markets will need to reprice the path for interest rates and real bond yields sharply higher in some developed economies, with secondary consequences for equities and other risk assets.”
There had also be a shift towards active use of fiscal policy during the pandemic, among several factors which made this an unusual year. Other factors included fast-moving developments on economic, health and policy, an unfamiliar economic landscape and an uplift in market volatility.
“Investors should expect surprises and occasional market setbacks in 2022. With many asset markets looking fully valued and central bank support receding, the recent uplift in market volatility is probably a good taste of what lies ahead. In this environment, diversification should be valued and a dynamic approach to asset allocation could likely be rewarded.”
O’Connor said the most favourable risk/return outlook was to be found in developed market equities, particularly UK, Eurozone and Japanese stocks, while he was “unconvinced” by emerging markets due to risks in China.
