Geopolitical uncertainties and inflationary pressures signal tough 2022 markets

Although the virtual summit between Mr Biden and Mr Xi seemed to lower tensions a notch, the ever more ambiguous US stance on Taiwan, renewed allegations of China’s human rights abuses, and talks of boycotting of Beijing Olympics dashed hopes for any lasting improvement in relations. Moreover, China’s latest antitrust probe on the country’s tech giants, not to mention, Alibaba’s dismal quarterly results which further underlined the country’s slowing consumption blew away bullish scenarios of some who had speculated that we have entered calmer waters in regards to China’s stock market. 

If these uncertainties were not enough, there are now growing concerns about Russian troops being amassed near the Ukrainian border. Indeed, Mr Putin is pressuring Germany to approve Russia’s gas exports from its newly completed Nordstream2 pipeline to help ease fast rising energy prices in Europe as we approach the coldest months of winter. Moreover, some seasoned analysts seem to think the latest attempt by Mr Biden to convince allies to release strategic oil reserves will unlikely to have a lasting impact on lowering energy prices without more exports from Russia and as long as boycotts on Iran’s oil continue.  

Moreover, growing voices of quickening the pace of QE tapering among US Fed officials were also in the headlines as prominent proponents of tighter monetary policy provided stark warnings of persistent inflationary pressures, especially in regards to wages. With US fiscal policy also becoming increasing accommodating, hawks argue that the upward pressure on aggregate excess demand is likely to persist for some time while prospects of economic policy errors have notably increased, even if some of the inflationary pressures prove transient. Indeed, evidence of asset price bubbles emerging almost everywhere are keeping professional investors increasingly on their toes as cheap money era look to be coming to a close. 

Japan’s newly announced record fiscal stimulus of ¥56trn or just over 10% of real GDP also didn’t disappoint as Prime Minister Kishida emphasised the need to get the economy back on track with helicopter money, or handing people cash proposed as one way of reviving Japan’s anaemic consumption. However, the prospects for continued pork barrel politics by Japan’s lawmakers, ahead of next year’s Upper House elections left some economist sceptical of the lasting impact of this latest stimulus package while Japan’s cumulative budgets deficit continues to balloon. 

This brings us to our own stock market in Japan which although it remains on an upward trend, it has failed to keep up with other majors this quarter. This weak showing comes despite record share buybacks which have thus far surpassed ¥7trn or 50% above last term’s level with prospects looking good for more to come. With latest corporate earnings results proving fairly decent despite rising input costs, and with the yen testing its four-year lows against the dollar, we see Topix remaining on track to surpass its September highs before year-end. However, given the above developments, there is no doubt that markets’ outlook for 2022 is becoming increasingly uncertain and should prove far trickier to navigate.