KUALA LUMPUR (Nov 25): The significant disruptions to supply chains seen in 2021, largely linked to Covid-19-related capacity shutdowns and transportation bottlenecks, are set to diminish going into 2022, said British multinational asset management company Schroders.
In its "Outlook 2022: Global and thematic equities" report released on Thursday, the firm said supply chain backlogs historically adjust quite rapidly after periods of stress, as the market responds to higher demand and rebuilds inventory.
"We see no reason to assume that this won't be the case in 2022, and indeed freight shipping rates have already started to fall.
"However, energy prices are likely to remain elevated for a number of reasons," it said.
Schroders said the economic recovery is boosting demand for oil and gas (O&G) at a time when supply growth is static.
It said as governments have encouraged energy companies to spend more money on renewables, spending on traditional exploration and production has been cut.
"As a result of this underinvestment, supply is not only tight but in many cases set to shrink quite rapidly, particularly if emissions targets are to be met.
"Consequently, traditional energy prices will likely stay high for some considerable time," it said.
Schroders said there can be little doubt that, in the future, O&G reserves in the ground will be worth a fraction of their implied value today.
But, for the time being, it said traditional energy may generate supernormal cash flows and profits.
"We don't believe that that is a consensus view," it said.
Margins will be under pressure
Meanwhile, it said margins will be under pressure in many industries.
Schroders said corporate earnings growth in 2021 has been remarkably strong.
It said record monetary and fiscal stimulus has supported the rapid turnaround in business activity after Covid-19 vaccines were approved late last year.
"US companies in the S&P 500, for example, are on track to deliver US$225 per share of earnings in 2021, or a 65% increase compared to 2020.
"The fact that earnings have been so good in 2021 makes it very likely that there will be significant challenges in 2022," it said.
Schroders said not only are US margins now back at record highs, but the full impact of higher input costs has also yet to be felt.
It said with the tight labour market creating competition for qualified workers across multiple industries, there will be further pressure on margins, particularly in the service sector.
"These all add up to a much more challenging environment for profitability," it said.