Looming inflation threat casts uncertainty over 2022, says AGF CEO

Higher prices across the board, interest-rate fears, and virus threat are just some concerns investors must navigate

Looming inflation threat casts uncertainty over 2022, says AGF CEO

The economy might be in strong shape heading into the new year, but that’s not nearly enough to nullify the uncertainties kicked up by the pervasive threat of inflation at levels not seen in decades, according to the CEO of AGF Investments.

In the company’s newly published 2022 outlook, Kevin McCreadie, who is also the chief investment officer, highlighted how higher prices for necessities like food and fuel could erode demand for discretionary goods and products, which could in turn cut into earnings growth. But a worse-case scenario, he said, would come if continued inflation were to provoke higher interest rates.

“In this case, it’s less about distribution of demand than about a reduction of demand, because most everyone’s cost base … becomes more expensive and cuts into their purchasing or earnings power,” McCreadie said.

While several emerging markets have already hiked rates to fight the flames of inflation, most developed nations have yet to follow suit. The Federal Reserve, for one, is still asserting that U.S. inflation will ease to a level closer to 2% over time; even as the market expects two rate hikes next year, the central bank is still reticent about raising its overnight lending rate.

The Bank of Canada, McCreadie said, should meet expectations that it will raise its key rate sometime in the first quarter, though it isn’t signalling as many hikes as some observers believe it should. In announcing its last interest-rate decision for the year – in which it maintained the key rate at a dovish 0.25% – the BoC said senior decision makers aren’t expecting to announce hikes until some time between April and September 2022.

While inflation should ease as pandemic-induced kinks are worked out of global supply chains, he said it could prove to be more persistent due to rising wages and labour costs, which aren’t so easy to remedy. Inflation in and of itself isn’t a negative for the economy, he added, as long as it’s at a moderate-enough level to allow for slow and measured rate increases.

Still, he emphasized that investors should not totally dismiss the potential dangers that come with stubbornly high prices, as well as the prospect of stagflation.

“While there’s little reason to believe economic growth will collapse over the next 12 months, it’s conceivable that it will likely slow from the torrid pace of expansion this past year,” McCreadie said.

Even as global growth is likely to continue without additional fiscal stimulus, the resulting deficits from many of the programs over the past two years may necessitate higher taxes. China, he added, could sap some energy from the recovery as the world’s second-largest economy continues to navigate energy and material shortages, a regulatory crackdown on key Chinese sectors, and the implementation of a zero-tolerance COVID-19 policy.

“In other words, caution is advised as investors head into 2022 – but not at the expense of optimism, McCreadie said. “While more subdued economic growth and higher market volatility may be defining characteristics of the year ahead, so too will the pockets of opportunities that arise in this type of an environment.”