Restrictive stance from central banks: The economic situation is strong enough
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Central banks are adopting a restrictive stance in 2022

The investor-friendly course has come to an end. Central banks are tightening the interest rate screw and adopting a more restrictive stance. Where can investors still find attractive return opportunities? Financial markets forecasts for 2022.

What does the restrictive stance mean for investors in 2022?

Central banks drew attention with their final policy decisions in 2021: the major central banks now assess the growth environment as solid enough to introduce less expansionary monetary policies and to start to deal with high inflation. For instance, banks have announced for 2022 interest rate increases and the reduction of bond purchases. The stance of the key central banks should therefore be less investor friendly in 2022 than it was during the past two pandemic years.

Long-term strategies pay off on the financial markets

By entering 2022, investors are facing a number of uncertainties, such as inflation fears, uncertainty about central bank policies, and renewed COVID-19 worries. In order to manage risk in the face of these circumstances, the quote of economist and professor Benjamin Graham says it all: "Successful investing is about managing risk, not avoiding it."

The quote refers to the importance of a long-term strategy since this determines over 82% of the portfolio performance in the long term. Overall, we recommend that investors have a properly diversified and balanced portfolio in 2022 as well, with a clearly defined strategic asset allocation that offers constant, risk-controlled market exposure.

Economic situation: Strategy is key for performance

Depending on the economic situation, portfolio performance is based on the right strategy

Source: Feri Trust 2022, Financial Analysts Journal, May/June 1991: Gary Brinson, Brian Singer, and Gilbert Beebower, "Determinants of Portfolio Performance ||: An Update," Credit Suisse

Forecasted financial market developments for 2022

Equities:

Despite the current risks, the economic outlook remains supportive of equity markets over the medium term. Global equities remain supported by solid earnings growth and are expected to deliver high single-digit equity returns in 2022. Reflation should ensure that earnings continue to grow, albeit at a much reduced pace compared to past quarters. Investors can find attractive investment opportunities especially in cyclical markets, such as Germany and Japan, sectors, such as finance and raw materials, as well as value stocks in the euro zone and small caps across the globe.

Fixed income:

2022 is being foreseen as a challenging year ahead for bonds. As central banks focus on unwinding quantitative easing and turn toward policy normalization, yields should rise moderately and government bonds will likely deliver negative returns in 2022. Investors should be highly selective with their fixed-income investments and should keep durations short. An interesting alternative to high-yielding credit in developed markets are global senior loans, which should benefit from a higher government bond-yield environment, low expected default rates, and rating upgrades in 2022.

Financial market 2022: The decades-long bond bull market is ending

Financial market 2022: The decades-long bond bull market is ending

Source: Bloomberg, Credit Suisse Ltd.
Last data point: January 4, 2022

Foreign exchange:

The US dollar should be supported by the Fed’s policy normalization path, particularly against the Swiss Franc and Yen. The EUR/USD rate should remain soft in early 2022, but later stabilize as euro zone fundamentals improve.

Commodities and real estate:

Commodity prices, especially the oil price, and volatility on the gas or power markets remain at an unusually high level. Meanwhile, gold has failed to benefit from macro worries. Prospects for base metals stay murky near-term and China property risks loom. Eventual corrections could be entry points for investors as longer-term outlooks are constructive and commodities still serve as a hedge against unexpected inflation in a portfolio context.

Further upside potential is believed to be limited when it comes to real estate, as the prospect of rising benchmark yields tends to hurt the yield-sensitive listed real estate sector, while the earnings outlook remains muted due to the increased popularity of e-commerce and working from home.

Private markets and hedge funds:

The economic backdrop remains supportive for private markets, while investment conditions are more competitive. Market conditions for hedge funds remain favorable, but low-beta strategies are preferred. In addition, alternative investments in private equity, real estate, and hedge funds offer opportunities to diversify portfolios and returns.

The economic situation is calming down – inflation should decrease

A normalization of inflation is expected for 2022, even though inflation rates are likely to remain higher than before the pandemic. However, it could prove more persistent in some areas including residential real estate and wages.

The importance of sustainability will impact the financial market in 2022

Finally, environmental, social, and governance (ESG) themes will continue to influence consumer behavior, business, and investing decisions in 2022. While this will put some companies and sectors under pressure, it will open up entirely new opportunities and possibilities for others.

Do you have any questions about this topic?

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