Investment strategy: A look at equity performance in 2022
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Investment strategy for equities: What investors need to know for 2022.

Corporate profits will likely be the most important driver of equity returns in 2022. The new Investment Outlook from Credit Suisse highlights exciting forecasts of financial market trends and what you need to know for a successful investment strategy in the new year.

Review of financial market events in 2021

A look back at 2021 shows that most equity markets and regions generated impressive returns. Profits for the MSCI AC World exceeded their pre-pandemic highs, resulting in high share earnings.

At the same time, however, the price-earnings (P/E) ratio decreased. This is attributable to the fact that the level was already elevated, but also to the fact that investors are expecting fiscal and monetary policy aid measures from the COVID 19 era to decrease.

Financial market developments: Profits growing faster than prices

Price-earnings ratio: Profits growing faster than prices

Last data point: October 28, 2021
Sources: Refinitiv, Credit Suisse

Forecasts of financial market developments for 2022:

Against this backdrop, "normalization" is expected in 2022. Following the previous year's double-digit rise in corporate profits, consensus forecasts for 2022 point to profit growth in the high single digits. Similar performance is expected for share earnings. Household financial situations also remain solid, meaning that the positive macroeconomic environment is likely to support revenue growth.

Investment Outlook: Growth of earnings per share likely to normalize

Forecast for MSCI AC World profit growth

The growth of earnings per share (EPS) will likely normalize in 2022.
Last data point: September 23, 2021
Sources: Refinitiv, Credit Suisse

Companies can generally expect solid margins for 2022. That said, their leeway to pass rising costs on to consumers is disappearing. This is due to increasing input costs and the growing divide between producer and consumer price indices.

As such, pricing power is a crucial topic for equity investors, since companies that can pass higher input costs on to consumers will perform better than those with little pricing power.

Risks investors should take into account for their investment strategy

Global equities face a number of risks that investors should bear in mind in 2022:

  • Rising input costs could serve to curtail profits/margins
  • Supply chain disruptions could lead to potential adverse impact on profitability
  • Surprisingly persistent inflation could lead to restrictive monetary policy conditions and "political errors"
  • US mid-term elections could introduce a potential political stalemate situation
  • A new COVID-19 variant that vaccines are less effective against
  • China's slowing economy and additional regulatory burdens

Fed announces tapering of financial purchases – how will financial markets react?

In order to calm the shock to equity markets triggered by COVID-19, central banks increased the volume of securities purchases on their balance sheets in 2021. In conjunction with low interest rates, this excess liquidity later drove the powerful equity rally.

The volume of securities purchases was increased during the past year

 

Volume as percentage of GDP:
February 2020 (%)
Volume as percentage of GDP:
November 2021 (%)

USA

19.2 37.5

Euro zone

39.2 69.2

Japan

104.7

132.8

The Fed announced a reduction of its asset purchases – also referred to as "tapering" – at its November 2021 meeting. From a current standpoint, it can be assumed that it will reduce its purchases over a period from December 2021 to mid-2022.

Due to the current economic situation, the market will most likely handle this tapering well: Real interest rates are low at −0.86%, and valuation multiples are correspondingly high. With this in mind, any correction on equity markets triggered by the tapering will likely represent a buying opportunity for investors.

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