Leaving behind a momentous year marked by new phases of the pandemic and by sputtering efforts to re-start the global economy, we look ahead to 2022. Can we overcome the effects of issues such as disrupted supply chains and shifts in consumer demand? How can investors navigate the ‘rapids’ that will characterise the next stages of the economic recovery?
Listen to the podcast with Daniel Morris, chief market strategist, as he discusses the investment outlook and the possible course for macroeconomic policy as it seeks to tackle the social and economic challenges laid bare by the Covid. Or read the executive summary of our outlook below.
MACROECONOMICS AND MARKETS
This section highlights our views that:
• While some production constraints will remain well into 2022, they will be resolved eventually, enabling economies to revert to trend growth rates without generating higher inflation on a permanent basis.
• Substantial accumulated household savings mean consumers have the resources to go on a spending spree that could have inflationary consequences. If, however, the after-effects of living through a global pandemic inhibit consumption, central bank and state support may be needed to encourage demand.
• We expect the momentum behind rising wages to fade as employers adjust processes and invest capital to reduce their dependence on labour. Today’s relative weakness of organised labour means comparisons with the 1970s are inappropriate.
• Equities will struggle to generate above-average returns in 2022. European equities look set to make up lost ground with their US peers. One of the critical calls will be whether value stocks can begin to reverse their underperformance of the last several years. The wide valuation gap between value and growth stocks and the prospect of higher interest rates suggest upside is ahead.
• While intransigent inflation is likely to lead the US Federal Reserve to raise policy rates several times from the middle in 2022, we expect only a short cycle of increases in key rates. The upside of longer-term US Treasury bond yields should be limited by capped inflation expectations and the size of the Fed’s balance sheet keeping real yields low.
A SUSTAINABLE RECOVERY
We believe the green economic transformation can offer investors significant opportunities.
The current crisis is a reminder that we as investors must align investing with the realisation of sustainable long-term growth. Investing for the long run will be crucial, because the typical 3-5 year investment cycle does not match the lifespan of financing the shift to green hydrogen or the innovation required to achieve e-mobility, restore natural capital and build green infrastructure.
INVESTMENT THEMES FOR THE LONG RUN
Our investment themes for 2022 have both a sustainable angle – energy transition and environmental sustainability – and a focus on long-running trends including healthcare innovation and disruption via new technology.
Our regional spotlight focuses on China, the world’s fastest growing major economy, home to many innovative companies and a market that increasingly warrants a standalone allocation within multi-asset portfolios.