Investment acumen. Global reach.
Regions Bank Chief Investment Officer Alan Mcknight is well known in national media circles and among the investment community. He recently took his show on the road – virtually – serving as the keynote speaker of CFA Society Shanghai’s first learning and development webinar hosted in English since the organization’s establishment in 2020.
Aptly titled the “End of the Beginning,” McKnight referenced Sir Winston Churchill’s 1943 prophetic quote: “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
For more than two years, the U.S. markets and economy have been in constant flux. From supply inflation and interest rates to supply chain and stimulus, the pandemic created economic waves that have had an ongoing impact on markets across the globe. McKnight dives into the variables across domestic, developing, and emerging markets as investors weigh what may come next and how they might adjust their portfolios to weather the continuing storm.
“I believe we are at the beginning of the end as far as it relates to the monetary stimulus on a global scale and shifting into a mid-cycle as it relates to the economy and where we are from an economic outlook perspective,” McKnight shared with the audience of more than 150 attendees.
According to McKnight, 2021 was a banner year for countries across the world as it related to growth. Looking into 2022, he noted there will likely be a precipitous drop in the growth from the prior year. This is driven by the return to normal and sheer amount of stimulus provided by the Federal Reserve in U.S. and by the European Central Bank in the Eurozone.
“As we look out across the global landscape, the first point of reference is around what we expect from GDP,” said McKnight. “Where are we seeing growth, where are we seeing above-average growth?”
In 2022, McKnight said emerging market growth may be higher than the developed market peers. Consumer Price Index (CPI) in the U.S. jumped to a level of 4.7% on average last year, but he pointed out that readings have been as high as 7%, which he said is a concern for the markets. There has been some restraint in consumer spending as a result.
“Many thought this to be supply chain related,” said McKnight. “But reality is that transitory inflation is becoming a global issue.”
Companies will have to lower margin expectations, shared McKnight, highlighting that in the U.S. operating margins are at their highest level in more than 20 years. And higher costs create challenges for the year ahead.
“China had restrained higher costs in late 2021 and early 2022,” said McKnight. “The global central banks are really on top of this, and it is more problematic in the U.S. and Europe.”
McKnight continued that China is a standout for its ability to manage inflation and input costs.
“As noted, emerging central banks have been in front of the curve and inflationary trends,” said McKnight. “There have been over 70 rate increases across the globe in the past year – most in the emerging world.”
The increase in producers’ prices has been staggering according to McKnight. He noted that baseline prices deflated initially going into the pandemic but skyrocketed over the last 12 months as producers try to get in front of input costs and pass those costs onto consumers.
Lumber costs are also significantly higher, and building has been picking up over last 12 months. Home sales and starts were restrained after 2008 with 500,000 fewer homes built.
“Since the pandemic, we have seen that pick up again,” said McKnight. “Price increases are passed on to home buyers in the U.S. It is similar in Europe, though we are not seeing the same population and immigration growth there as in the U.S., so it is slightly slower.
“Those who cannot remember the past are condemned to repeat it,” said McKnight, citing Irish stateman Edward Burke, as he talked about investment strategy in 2022.
“We are trying to take a long view of economic and market data in our investment strategy,” said McKnight. “The U.S. market is relatively more highly valued than peers or competitors in other parts of the world.”
As it relates to capital market expectations over a 7-to-10-year basis, McKnight breaks down his insights on what to consider and where investors should consider allocating capital:
- The Central banks are moving away from accommodating policies – pulling back from bond buying programs, which have tapered down to $40 billion.
- In the U.S., the Federal Reserve will begin raising rates. We expect to see similar removal of some of these policies from European Central Bank. Other Emerging markets have already seen rate increases to get ahead of inflationary trends.
- Relative value – valuations in the U.S. are higher than the rest of the world and as investors look for yield, they will look abroad to emerging markets or developed world markets, including Europe and Japan to generate higher income level.
“The market overall has gone up and owning it has been fruitful,” said McKnight. “We think this year with markets and earnings being more volatile, that quality will be more important. Better margins and higher profitability will be better in 2022. We’ve seen a global phenomenon in that markets have moved higher and have not differentiated between higher quality and lower quality companies. We expect that to change moving forward.”
McKnight, who regularly shares his insights with national media, recently appeared on CNBC’s Worldwide Exchange to talk about Inflation and the Markets. What to Know Now with Courtney Reagan.
Alan McKnight is the Chief Investment Officer for Regions Asset Management, part of Regions Bank Wealth Management where he is responsible for developing consistent and comprehensive asset management strategies to meet the needs of individuals, families and institutional clients.
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