Bull and bear in front of the Frankfurt Stock Exchange, by the sculptor Reinhard Dachlauer. Photo: Eva K.
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Bulls bet on shallow interest rate hikes in 2022

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Investors seem to be topping up their portfolios with stocks as inflation expectations cool for the rest of 2022, and central banks, such as the Bank of England, the U.S. Federal Reserve, and the European Central Bank, take tough decisions on interest rates to tame soaring prices.

With headline inflation rising by the end of 2021 to its highest level in the last two to four decades, central banks have been behind the curve on inflation and have largely failed to keep prices under control, according to the CEO of a leading financial advisory and fintech.

“This is why many are now currently playing catch-up with the tightening of monetary policies,” said Nigel Green of deVere Group.

“Such is the panic of persistent inflation and the measures needed to deal with it, that some analysts expect the likes of the Fed – the world’s most influential central bank – to raise rates five times this year.

“This has had the effect of hitting some stock prices, especially in the tech sector,” explained Green, with the tech-heavy Nasdaq index suffering its worst month in January since the pandemic first jolted markets in March 2020.

Tech stocks missed expectations

Shares in Meta, the owner of Facebook, plummeted more than 20% in after-hours trading on Wednesday.  Elsewhere, PayPal, which missed expectations, dropped almost 25% the following day, and Spotify shed up to 23% in after-hours trading before regaining some ground to trade around 10% lower.

“However, many investors now believe that we could hit peak inflation by the end of this quarter, as global supply chains, which have been largely responsible for price hikes, begin to return to some sort of post-pandemic normality,” said Green.

The deVere chief executive said this would mean that interest rates will not have to be hiked as much or as often as some commentators have suggested, adding that this would be bullish for stock markets.

“Investors are now moving to top up their portfolios with high quality stocks that have been hit by the talk of aggressive rate hikes throughout the rest of the year,” he said.

“They see the current dip as a discount and are using it as an opportunity to build their long-term wealth.”

Following last month’s Fed meeting at which the Chair Jerome Powell all but confirmed an interest rate increase would be implemented in March, the deVere CEO said: “I would urge the Fed not to fail on inflation again by hitting the brakes with too many rate hikes.

“The excess money in the system will come out fast. There’s a real risk that numerous interest rate hikes would cause a recession and may not even slow inflation as the soaring prices are triggered by supply chain issues which the Fed’s hikes will not solve.”

Green concluded that for the remainder of this quarter, “bullish investors will be betting on inflation peaking, resulting in shallow rate hikes for the rest of the year.”