Year 2022 will mark the end of low inflation & ultra low interest rates era.

PaulRen's picture

Time are changing to a recovering Thai economy next year but along with that, new headwinds of higher interest/inflation in time.

I am proud to say, I here predicted often, how low interest rates would prevail and be positive for stocks.  But that low interest rates' era, over a decade now, is coming to an end. Thailand may lag on this for a while but in time will have to follow suit. If not, its currency will sink.

Next year 2022 will mark the end of a long period of low inflation along with ultra low interest rates. This is more important than many realize.  In the US housing prices are extremely interest rate sensitive, where even a small uptick, immediately dents housing prices.  As so mkt. prices of long-term bonds. Stocks and company values in general as well, especially high growth and technology rated companies.  In Finance 101 one can prove why this is so.   I am amazed how some Thai shares here are trading with multiples approaching 50 and yet still being buy touted by brokers. 

I think this time around it will be especially poignant because interest rates & inflation have been at historical low levels for over a decade and hence many may have forgotten or got used to this ear.  But times are now changing fast now along with mkt sentiment which often affects valuation more than most think.  Beware of high p/e stocks is my advice.

Just this morning CNBC  reports  “The US Fed is expected to announce a dramatic policy shift Wednesday that will clear the way for a first interest rate hike next year…previously, there had been no consensus for a rate hike in 2022.”  While different central banks around the world will move in uneven ways, the US very often leads on this. Yet, inflation is the culprit and its picking up everywhere. Higher interest rates is the result.

When I was a young broker in the US, I remember a famous new & highly successful Mexican Restaurant chain, it was growing leaps and bounds and its stock price was rocking unevenly upwards for long.  Up to that point its revenues were growing just about 50% a year....  Then, one day the president announced in an upbeat way that new restaurant openings would still be growing 30% more next year, i.e. a bit less then his previous forecast.   The next few days its stock price dropped nearly in half because the market & mkt. sentiment sensed the superb high growth period was over.  We all learned an important lesson, along with its mgt.:  when the peak arrives, valuations sink.  This is further turbo enhanced if at the same time interest rates increase. (Which back then were stable.).  Unlike many analyst believe or acknowledge, % rates besides market sentiment is a big, big driver of valuations.  If one sits on a great asset class where earnings/revenues are growing fast, the peak will be, just about by definition, just before or at the maximum positive point.  And this is further influenced if interest rates increase at the same time.

Presently coming higher interest rates along with a peaking of a company’s revenue growth rate are two core attributes which will certainly dent p/e valuations going forward.  This reality has nothing to do with other broad global macro risks or set backs -which could happen anytime.  China recession/aggression, Russia invading, gigantic govt. deficit spending further crowding-out capital markets etc.., new virus mutations emerging.  Well, the list is far too long to here elaborate besides who am I to say where the next crisis will come from?  Also beware very often emerging markets take a hit when US and other interest rates increase.

Hence as this yet another turbulent year comes to a close, I just wish today to express some risks going into 2022 which however with a recovering Thai economy must be taken into consideration.  I could see a robust NY start on the SET (?), but on which one should consider some profit taking as next’s year recovery economy must be balanced with the new reality that the period of low interest/inflation rates is over….and that will certainly create headwinds.

Seasons Greetings to you all,

Paul A. Renaud.