Following a year of healing that was characterised by resilient growth, the economy’s next natural step is to slow down, thereby entering a self-sustained growth mode. While this probably translates into more modest returns, the conditions still offer attractive opportunities to investors overall.
The economic expansion should continue at a more organic growth rate, as policymakers adopt a tightening course to curb some of their very generous crisis programmes. Overall, uncertainty about inflation will persist as we enter the new year.
Considering the low visibility on the economy, our research analysts recommend a well-diversified portfolio construction that favours structural winners and the beneficiaries of higher bond yields. Flexibility will be particularly important for fixed income, so we focus on active duration management strategies and bond selection. We also think US dollar strength will resume in the short term and remain cautious on commodities overall.
In emerging markets, China’s regulatory crackdown has roiled performance; we expect headwinds to prevail. Thus, we prefer India given its large domestic market and compelling growth, which is capable of replicating the ‘new economy’ success story that has unfolded in China over the past 15 years.
A closer look at equities
Equities continue to be our preferred asset class, but within equities, as always, there will be some winners and losers. Resilience matters, especially in times of slowing (but still positive) growth. Resilient companies have robust operations in place that enable them to survive and even thrive in challenging market environments.
As we slowly progress towards a post-pandemic world, separating the wheat from the chaff (i.e. carefully selecting the companies to invest in) will be vital over the medium to longer term. We do not have a crystal ball. However, in 2022, we will focus on companies that are set to thrive in the new environment and will look for them from three different angles:
Companies that will continue to perform well after the initial rebound
Companies that will successfully navigate the transitory inflation spike and supply constraints, and
Companies that will benefit from the trends amplified by the pandemic.
More attractive opportunities in 2022:
Next Generation: Despite an already high adoption rate, cloud computing and AI are still very much on the rise. On a global scale, not only is computing power rising rapidly, but also the amount of data being produced that needs to be stored and analysed is growing at a phenomenal rate. Global data generation is actually set to treble in size in just five years, and cloud storage will provide data owners with cheaper and more secure storage abilities than traditional on-site methods.
Fixed income: The world economy is exiting crisis mode, default rates will likely stay low, and central banks are moving away from overly loose monetary policy. We favour bonds with attractive yields and only moderate credit risk and see opportunities across Asia and in the Middle East.
There is a lot to consider in 2022 for fixed income investors. Inflation uncertainty, negatively yielding bonds, and the US Federal Reserve’s policy decisions will shape the investment environment.
Inflation – on top of our minds
For 2022, we have identified two wild cards that could have far-reaching consequences for investors:
Central banks tighten too fast and too early: One of the most important questions related to the inflation debate is whether the current high inflation rates will push central banks to overreact and tighten monetary policy earlier and more forcefully, leading to a policy mistake.
Inflation remains sticky for longer: Although it is not the consensus view, there are market participants expecting inflation to remain persistent, which, in the worst case, could cause a 1970’s-type wage-inflation spiral to form, driven by ever-increasing expectations of further higher prices. In a scenario where inflation does not fade away, investors would be well advised to adjust their portfolios accordingly.