2022 Investment Landscape: Here we go again
April 12, 2022 | UMB
Overview: Play it Again, Sam
We are not forecasting a Groundhog Day phenomenon, but 2022 will likely resemble 2021 in many ways. However, as investors emerge from 2021, their concerns that the market is bound for a significant correction are not entirely unfounded. The global economy is slowly recovering, largely due to the reduction of COVID restrictions, particularly in the U.S., where they appear to be in their final stages. Local, state, and federal governments are re-thinking their COVID response policies, and, while Omicron has surged, it is unlikely to significantly impact the global recovery. Rising inflation is likely to subdue gains in equities in 2022 particularly against the backdrop of record valuation. Additionally, we recognize that the U.S. Federal Reserve will need to balance the move toward a less accommodative monetary policy with a fiscal policy focused on economic expansion. It is likely the Fed will hike rates, thus pushing up global bond yields. However, the frequency and size of the hikes remain elusive as experts weigh how to locate inflation drivers and durability in conjunction with maintaining growth and employment, rather than sticking squarely to an inflation anchor.
We remain positive on global equities in 2022, foreseeing strong growth in corporate profits that should more than counteract equities’ earnings multiples.
In contrast, bond markets are likely to experience headwinds, with U.S. Treasuries expected to post losses on the year even though yield on the 10-year will struggle to exceed 2%. With real yields on inflation-protected bonds at an all-time low, this segment of the market will also fail to deliver the necessary returns to investors. The dollar is expected to retail favorably despite trading well above fair value, thanks to the relative strength of the U.S. economy.
There are two additional factors to note:
1. Travel-related sectors are still performing at half their pre-pandemic levels.
2. Supply disruptions are expected to decrease throughout the year with the easing of mobility restrictions in Asia.
Overall, we predict the following trends for 2022:
• The global economy will be reasonably strong.
• There will be growth across regions and sectors.
• Inflation will remain above the trend line.
