Investment strategy: Confidence in the 2022 financial markets

A year of transition. What will move the financial markets in 2022?

Will the global financial markets develop next year as much as in 2021? Not really, says Burkhart Varnholt, CIO of Credit Suisse (Switzerland) Ltd.. However, he does look ahead to the new year with confidence. What are the six reasons for a positive outlook and what risks should external asset managers consider in their investment strategy?

Positive outlooks for the financial markets

"2022 will be a year of transition." This is how Burkhard Varnholt, CIO of Credit Suisse (Switzerland) Ltd. opened the online event Investment Insights – Global Outlook. After the unusually strong development of the financial markets in 2021, growth rates should normalize to a degree. "However, they will still be above the historical average," says Burkhart Varnholt.

External asset managers can also look ahead to the future development of financial markets with optimism. The following six reasons show why you should still have confidence when investing in the new year.

Investment Outlook 2022 – six reasons for confidence

1. Companies show high profit margins

Corporate profit margins are currently higher than ever before. For companies in the S&P 500, profit margins are around 14 to 15 percent, and margins are also developing positively in Europe and Switzerland. The fact that wages are rising does not change this. This is because increasing profit margins and increasing wages currently go hand in hand. For Burkhard Varnholt, the explanation for this contradictory development lies in the strong increase in productivity. "Since the end of the lockdown, productivity in the US has seen the strongest recovery ever recorded."

And the room for improvement has not yet been exhausted. The growing digitalization and optimization of product and service portfolios, supply chains and production processes provide further room for improvement.

2. Corporate profits are higher than ever

The absolute cumulative corporate profits are growing more than ever and have reached a record level. This explains the historic highs in the stock markets. "Because equities are driven and supported by corporate profits," says the investment expert.

As profits grew more than the major equity indices in 2021, prices have further room to rise in 2022. Even if profit growth will slow down somewhat, as expected. Investors in the stock markets can expect a return in the high single digits in the new year, i.e. between 5 and 9 percent.

3. Deferred demand for equities

The boom in corporate share buybacks is expected to continue in 2022 as debt costs remain lower than equity costs. In addition, many institutional investors such as pension funds are still structurally underinvested in equities, says Burkhard Varnholt. "In conversations with pension fund managers, I am very often asked how they can increase their equity exposure in the coming year." That is a positive sign for equities demand in 2022. In addition, the fear of inflation could lead investors to shift their portfolios from bonds to equities.

4. Monetary policy turnaround not in sight

In the major industrialized nations, no central bank has a mandate to make a U-turn in monetary policy. Nor is there any need to do so, as the economy has grown steadily in recent years and share prices are at record levels. At the same time, national debt is higher than ever and the pandemic has not gone away completely. So, there is a lot to lose with a radical interest rate move.

"Of course, tapering will become an issue next year," states Burkhard Varnholt. However, its impact on the investment markets is likely to be small. "So, if concerns about tapering trigger corrections in the stock markets, they should be used more for buying, not selling."

5. Inflation will pass its zenith in 2022

High inflation rates are to be expected next year. According to Credit Suisse forecasts, however, inflation is likely to peak in the second quarter of 2022 and decline significantly in the second half of the year.

This is because around 50 per cent of the current inflation shock can be explained by higher gas and electricity prices. This is likely to fall again in spring at the latest due to the warmer temperatures. This is also confirmed by a look at the future market for gas.

Another 40 per cent of inflation was caused by supply bottlenecks in international commodity trading. However, the congestion at the major cargo ports should slowly ease over the next few months. At the same time, the current supply shortage in individual sectors, for example semiconductors, will ease in the coming months as new production facilities become operational.

6. Disruptive technologies on the verge of a breakthrough

"A further reason for optimism is that we are potentially on the cusp of the most innovative decade in a long time," says Burkhard Varnholt. The 2020s could be characterized by disruptive technology, for example in the field of decarbonization. "Because the environment has rarely been so conducive to innovation."

There are three reasons for this: Firstly, capital has never been cheaper than it is today; secondly, an entire industry of venture capitalists has emerged where startups are not only provided with capital but also with entrepreneurial experience and a large network; and thirdly, innovative young companies are being supported by the state to an extent that we have never experienced in any of the last decades.

"Black swans" can influence investment strategy

Despite all the warranted optimism, investors should not totally disregard the "black swans" risks. These include, on the one hand, geopolitical risks such as a possible escalation of the conflicts in Ukraine or Taiwan. And on the other hand, inflation could still get out of control, contrary to expectations. This would mean negative development for bonds, whereas it would be positive for equity investments, at least to a certain extent. It is worth external asset managers considering such risks in their strategies.

Despite these risks, Burkhard Varnholt is still optimistic about the development of financial markets in 2022. At the end of the event, he gave the participants two key messages to take with them. Firstly, "Keep investing. Because the phrase 'time in the market' is more important than 'timing the market' in 2022 as well." Equities are likely to continue offering more attractive return prospects than government bonds, cash and corporate bonds. And secondly, "Stay curious. In the coming years, it will be more worthwhile than ever to invest in young, innovative companies and disruptive technologies at the forefront." This is achieved through thematic investments, private equity or venture capital.