Investment Perspectives 2022

Executive Summary

2021 was another positive year for risk assets

2021 was less stressful for investors than 2020, but it was an eventful year, nevertheless. Markets proved to be resilient, overall, and trends were quite entrenched. The different asset classes behaved mostly as we had expected, with equity markets moving higher, credit spreads tightening, and bond yields rising. The appreciation of the US dollar was more of a surprise, as was the severe underperformance of emerging markets, in large part due to heavy-handed regulatory interventions in China and political issues in Latin America.

The growth of corporate earnings was even stronger than forecasted. This growth drove equity prices much higher in developed markets, accompanied by a compression of valuations. As in 2020, rotations between investment styles and sectors were much in evidence, with the initial outperformance of value stocks being gradually clawed back. The above-average gains of the US mega-caps was also striking, making it difficult for active managers to beat the returns of indexes.

Central banks are facing serious challenges

Central bankers will be put to the test in the year ahead. They will need to find the right balance between their fight against inflation pressures, which they have underestimated, and the risk of withdrawing liquidity too quickly. Their task will not be made easier in view of the unpredictable evolution of the pandemic. The Federal Reserve has been more forthright than the European Central Bank in regard of its plan to unwind its asset purchase program and to raise interest rates thereafter. Following the projected end of its tapering in March, the Fed will then have to decide when to start hiking the fed fund rate. Current expectations are for this rate to be raised three times by 0.25% in 2022 from the current target rate of 0%-0.25%. The Fed’s communication has contributed to contain market volatility, at least so far, but a policy mistake could easily derail the prevailing positive market sentiment and trigger a correction of asset prices.

Markets are likely to look beyond the threat of new COVID-19 variants

The global economy is projected to grow 4.9 percent in 2022, according to the IMF, a growth rate which remains above average as the recovery continues. Recurring coronavirus outbreaks have created stop-and-start economies and governments worldwide will be hoping for a smoother recovery in the year ahead. This would contribute to resolve some of the ongoing supply chain bottlenecks. Each time new COVID-19 variants were found, capital markets recovered very quickly from brief periods of higher volatility. This behaviour of markets should persist, especially if new strains were to prove increasingly less virulent, as is the case with Omicron.

We still favour equities despite their smaller appreciation potential

We expect equities to be the main contributors to the performance of portfolios in the year ahead. Global earnings are forecasted to grow by 10% to 15% and they will be the main driver for the equity asset class as valuations are not expected to expand from the current levels. We anticipate more modest returns for the portfolios in 2022. Equities are unlikely to match their performances of 2021, whereas the environment will remain challenging for fixed income assets as key central banks tighten their policies to fight against elevated inflation pressures.


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