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Last year the world showed a mixed recovery, which could well prevail in 2022. Despite vaccination efforts, the Covid-19 pandemic continues to be the most important risk for economic activity, especially with the emergence of new variants that have sparked subsequent waves. The current regrowth caused by the ómicron strain is an example of what could persist throughout the year, at a time when economic agents continue to adjust to a new equilibrium.

The spike in cases has generated adjustments in the mobility of people, causing disruptions in various sectors of the economy. While the effects have been less than in previous waves, they have undermined the ability to recover to pre-pandemic levels, and even more so the transition to a new normal. Therefore, it is likely that disruptions in supply chains, transport and logistics, as well as increased costs of raw materials will prevail.

Another consequence of the shocks generated by the coronavirus was reflected last year in a sharp increase in consumer inflation. In the United States, inflation in 2021 was 7%, the highest since 1982, more than three times above its central bank’s long-term target of 2%. In Mexico, price pressures led the INPC to show an annual metric of 7.4%, an inflation figure not seen in two decades.

And like these cases we can identify a similar situation in the Eurozone, United Kingdom, Brazil, Chile and many more. Although there is a consensus among analysts and investors that world inflation will begin to ease in the coming months, price levels will still remain high for longer.

This combination of factors led several central banks, especially in emerging economies, to begin normalizing monetary conditions since last year, highlighting strong increases in reference interest rates in Brazil, Russia, the Czech Republic, Chile, Peru, Poland , among others. At the start of 2022, the outlook for global monetary policy is even more complicated, as the central banks of advanced economies are also expected to begin normalization. In the case of the US, it is anticipated that the Federal Reserve Bank will start the increase in the Fed funds rate as early as March, with the possibility that throughout the year the increase will be a total of 100 points base.

In Mexico, the monetary authority also made adjustments to its reference rate, which closed 2021 at 5.50%, after reaching a minimum of 4% in February. For this 2022, Banxico is expected to raise 50 basis points at its February meeting in response to a complex inflation outlook, as well as the less accommodative signals sent by the Fed. In total, this year the Mexican monetary policy rate could close at 7.00%.

As if that were not enough, investors will also have to take into account a number of important geopolitical factors. The midterm elections in the US, presidential elections in France, Brazil and Colombia, or even the tensions between the government of President Biden with Russia and China are some of the variables to incorporate in the decision-making of market participants. In Mexico there will be a special interest in the gubernatorial elections in six states (Aguascalientes, Durango, Hidalgo, Oaxaca, Quintana Roo and Tamaulipas), as well as in the activity on the legislative agenda, starting with the “open parliament” to discuss the initiative of electrical reform that begins this January 17.

In conclusion, the combination of factors described in this article, as well as the valuation of various financial assets (eg stock indices in the US at maximums or prices of some raw materials such as lithium or nickel also at records of one or two decades) suggests that investors will have to rethink their strategies to face this 2022 of lower growth and persistent inflationary pressures. Relative value strategies, favoring active over passive ones, greater flexibility in the positions of market participants, as well as a rotation of growth companies towards value ones, could be some of the options that we observe in the first months of the year to deal with the previously described situation.

* Alejandro Padilla is Deputy General Director of Economic and Financial Analysis at Grupo Financiero Banorte.

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