One country's pain is another's opportunity
Three things to watch in 2022.
An asynchronous global recovery Remember when everyone was talking about a synchronized global recovery, with central banks and governments simultaneously pumping out unprecedented stimulus to beat the Covid recession? Well, that harmonious moment didn’t last long. The resurgence of Covid variants and spiking energy prices—not to mention runaway inflation and diverging monetary policies (more below)—have turned global synchronization on its head. Energy-dependent countries from Europe to much of Asia are facing headwinds while energy-producing countries from Russia to the Mideast are generally reaping the benefits. Hundreds of billions that are being pledged to move towards sustainable energy may eventually help, but those investments will take years to pan out. Mind the gap in the meantime. Energy prices will remain elevated, and these higher energy bills will hurt economic recovery.
Not a time for ‘just in time’ I recently spent 10 days meeting with portfolio companies in Europe, and virtually every one of them had a sad supply chain story to tell. One that had been doing business with a semiconductor supplier for 20 years was told it would only be getting half to a third of its normal order this year. Now, it’s struggling to find another supplier, with the realization that whomever it finds, it’s going to be paying a lot more. Such cost-push shortages are all over as the just-in-time inventory model the world has used for the past few decades no longer works. Confronted with prolonged supply chain bottlenecks, companies are now weighing whether to carry more inventory, seek closer-to-home producers (or build their own), or both. But as with sustainable energy, these solutions will take time as the shortages won’t magically disappear overnight.
Lollipops for emerging markets At least, for the scores who took their medicine and hiked rates last year. EM central banks raised policy rates some 80 times last year, positioning their countries to potentially benefit from the expanding global recovery without having to further jam on the brakes just as the U.S. and Europe are getting ready to tap theirs. As noted above, spiking energy prices represent challenges for some (while benefitting others), making for an uneven recovery just as is the case in developed markets. But at least many will have already acted aggressively to protect their currencies. This is particularly true for China, which hung tough while the rest of the world was going easy. Now, it’s starting to ease and soften a regulatory crackdown on many key industries as it puts on a happy face before the Winter Olympics followed by next fall’s Chinese Communist Party’s 20th National Congress.