The policies and stimulus related to the pandemic – in extraordinary magnitudes – launched by the governments and global central banks have driven strong global economic recovery in 2021. Will that trend continue next year?
Normalization of economic growth and policies – monetary and fiscal – will be the main themes of global markets next year. After extreme decline in 2020 and a massive increase in 2021, economic growth ahead is expected to start moving towards a normal direction, which means global economic growth in 2022 will be lower than in 2021.
IMF estimated global economic growth to grow at 4.9% in 2022, lower than 5.9% in 2021. Although decreasing, this figure is still higher than the average for the last ten years which reached 2.2%.
As with monetary and fiscal policies, in line with the era of global economic normalization, global central banks and governments will also make adjustments to their policy directions. Interest rates are expected to increase gradually – while observing pandemic conditions – and pandemic stimulus will be gradually reduced to normal levels. Although reduced, fiscal policy and stimulus in both developed and developing countries will remain accommodative and higher than the long-term average.
Will the policy normalization have negative impact on financial market?
Currently, the market looks more prepared to face changes in economic conditions and policies in the coming year. Approaching the end of 2021, adjustments to market expectations will also continue, as can be seen from changes in consensus data showing market players are "one step ahead" compared to existing conditions, so it is hoped that volatility in the financial market will also be more controlled and measurable. Balanced communication from global central banks and governments will be very important in maintaining stability in financial sector.
After falling behind this year, what are the opportunities for Asia’s economy in 2022?
Growth normalization and improvement in global supply chains will have a positive impact on manufacturing sector and Asia’s economy. Asia's role as the world producer will benefit from high trade activity which is a proxy for global economic growth.
In terms of monetary flexibility, Asia has wider policy space, supported by controlled inflation and high real interest rates. ASEAN, especially, will be one of the stars that is quite prospective in Asian region. After falling behind in 2021 – due to the less than optimal handling of the pandemic – Asia’s economic growth in 2022 is expected to accelerate at a higher rate than the previous year.
Continuing the previous question, what about the potential of Asia’s financial markets in 2022?
We have a positive outlook; a more equitable economic recovery globally will have a positive impact on the previously falling behind markets like Asia’s market. Moreover, the attractiveness of Asia stock market is also supported by a better earnings growth projection, foreign holdings position that is relatively low, and its relatively cheap valuation which is currently at 25% discount to developed countries.
Turning to domestic, if it was mentioned earlier that the theme of the global market next year is normalization, what about Indonesia's economic outlook?
Unlike some regions that will experience growth normalization, Indonesia is actually expected to experience a more optimal economic growth acceleration in 2022. The momentum for reopening the economy is expected to increase in the first quarter, when vaccination would have had a wider coverage, which is expected to reach 70% of the population. Indonesia's demographics, which are dominated by young people, will also bring benefits, accelerating economic activity back to normal, especially if the purchase of boosters is further expanded.
Inflation is one of the things that investors are most worried about, especially in global markets. Is inflation also a risk that needs to be watched out for in domestic market?
So far, we think inflation expectations for 2022 in Indonesia will be relatively manageable. Indeed, there will be potential for increase due to several factors such as stronger economic recovery momentum, potential increase in administered prices for fuel oil and electricity, the impact of VAT increase, and increase in raw materials price charged to consumers. But we expect the pressure to be relatively under control in the range of 3% +/- 1%. This condition provides room for Bank Indonesia to continue implementing policies that support economic recovery.
How will Rupiah exchange rate fare amidst the potential tightening of world monetary policy?
Rupiah is currently stronger in facing global sentiment changes, despite the potential to weaken amid changes in global monetary policy and the normalization of world commodity prices, but stability will still be maintained, supported by three main pillars: prudential monetary policy implemented by Bank Indonesia, stronger external resilience, and adequate foreign exchange reserves. Foreign holdings in Indonesia's bond market, which are already much lower, will help reduce potential pressure from foreign fund outflows.
In terms of risk management, what negative catalysts that need to be watched out for ahead?
New Covid-19 variants and vaccine effectiveness, as well as communication between the government and the central bank on changes in monetary and fiscal policy – their magnitude and speed – are some of the main risk factors that need to be considered in the future. The quality of economic data release in the coming months will affect how global monetary normalization policy will be carried out.
What stock portfolio investment strategy you will apply to face the very dynamic 2022?
In order to generate and maintain alpha in portfolio performance, our management strategy will be divided into two approaches:
Also we keep a close watch on liquidity and volatility to make sure that our investment management generate optimal result with controlled risk.
Samuel Kesuma. CFA
Senior Portfolio Manager – Equity
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