Investment strategy 2022
Investment strategies for 2022
Central banks and their assessment of economic conditions will likely be front and center once again in shaping investment strategies in 2022. As COVID-19 moves from pandemic to endemic, an inflation threat has superseded the deflation worries that loomed in the early days of the crisis. Disrupted supply chains are one contributing factor, and they may remain challenged in coming quarters and keep upward pressure on consumer prices. Nevertheless, central banks will likely pursue a slow and gradual normalization of monetary policies, as they are of the view that the current spike in inflation should be transitory.
We expect the US Federal Reserve (Fed) to start hiking rates in late 2022, followed by four additional hikes in 2023. The Fed’s introduction of a more symmetric inflation targeting approach and the acceptance of a temporary overshoot provide further support for a measured path to normalization, which could help to reduce the pressure from rising public debt burdens and ultimately contribute to the economic recovery.
“Central banks and their assessment of economic conditions will likely be front and center once again.
The inflation factor
We forecast global inflation of 3.7% in 2022, with broad disparity across countries. This scenario implies that a higher-than-normal cash allocation within portfolios should be avoided, as purchasing power could fade quickly. The same applies in general to nominal assets such as bonds, where a fixed interest is paid and the invested amount is paid back at face value at maturity without adjusting for inflation. The outlook is brighter for those financial assets that behave positively with rising inflation (i.e. real assets). Take equities, where the price of a stock reflects future earnings expectations. Rising inflation stems from the fact that companies can raise prices for their products/services, boosting their profitability. Our global nominal gross domestic product (GDP) growth forecast (an estimate of real GDP plus inflation) of 8% in 2022 allows for plenty of revenue and earnings growth potential, helping to offset any inflationary pressure. Nonetheless, rising government bond yields will likely become a headwind for equity valuations eventually, especially if real yields turn higher and cross into positive territory again, though we do not think that this will occur in 2022. Equity sectors and segments that are aligned with strong structural growth drivers, including those identified in our Supertrends thematic framework, can help offset the impact of inflation.
Core bond returns limited
This normalization of monetary policies will kick off with a gradual reduction of fixed income asset purchases by central banks, which together with the broadening economic recovery should pave the way for interest rates to grind higher. Rising yields would negatively impact bond prices, and the current low income from bonds combined with tight credit spreads would offer little compensation. Our return expectations for government and corporate bonds is thus limited. Nevertheless, we believe that there should be an allocation to core bonds within multi-asset portfolios for risk mitigation purposes (i.e. bonds’ shock absorbing qualities), though their actual return contribution may be minimal.
Stay diversified
When approaching portfolio risk management, the key is to seek out assets with return profiles that depend on different factors. These diversification effects can be further improved with investment strategies that follow non-traditional patterns. For example, there are hedge fund strategies that can go both long and short equities to expand their opportunity set. Finding investment strategies to compensate for low investment income from bonds is a difficult task. Dividend-focused equity strategies, with an emphasis on companies with sound balance sheets and strong cash flow production, or return-enhancing equity option strategies can be interesting alternatives, as are non-core bonds if widening spreads were to offer an opportunity. Real estate is another approach, as the ongoing economic recovery is supportive. Private equity also offers an opportunity to boost a portfolio’s return profile amid ongoing market dislocations and the continuing economic recovery. However, private equity is only suitable for those investors who can tolerate greater illiquidity than with traditional investments.
