Heated by the sunshine of a vibrant recovery, the magic liquidity is evaporating, and turning into fog for investors. While growth remains robust, markets may not be ready for the new uncertainties around central banks, inflation and interest rates, to name a few. We are getting prepared to navigate tactically, in a year of ‘low visibility ahead’.Global Investment Outlook 2022 Report
"Why is 2022 a different year, with low visibility ahead?
As valuations are elevated, upside potential is modest while markets are vulnerable to uncertainty. We thus expect a year of modest, normal returns, with abnormal volatility."
Our theme for 2021 was “Investing in the age of magic money”. The recovery was enabled by vaccines, kickstarted by fiscal stimulus and turbo-charged by monetary support.
2022 is different. Heated by the sun of economic growth, the magic liquidity has started to evaporate and turn into fog for investors.
Our central scenario is not adverse. The recovery will continue and complete, despite the virus and central bank tightening. But there are many big open questions which will need answers: from the virus to inflation, from China to technology. As valuations are elevated, upside potential is modest while markets are vulnerable to uncertainty. We thus expect a year of modest, normal returns, with abnormal volatility. This is why, in the context of low visibility, we are prepared to adapt to changing conditions rather than trying to guess what lies ahead. Reactivity should this time prevail over proactivity.Global Investment Outlook 2022 Report Contact us now
"Selectivity over plain directional exposure.
We expect elevated volatility, and probably more differentiation. 2022 should be a year of nuances, where our stance towards quality and pricing power should be rewarded."
The single most important driver for stock market directions is earnings growth. To that extent, we forecast another positive year with robust economic growth as a backdrop. The situation is less simple when it comes to valuations. Developed markets seem to already discount many good news, while more accessible emerging markets have to deal with significant uncertainties, especially around China. From high altitude, our year-end fair values indicate a fundamental potential of single digit returns for DM and low double digit for EM. We however also expect elevated volatility, and probably more differentiation. 2022 should be a year of nuances, where our stance towards quality and pricing power should be rewarded. We keep on recommending a balanced approach between value and growth, but with much more selectivity in the latter. We favor healthcare and think that only the true winners in technology will do well. Our regional preferences include the US within developed markets, which are home to some of the world’s best companies, as well as the UAE and India within emerging regions.Global Investment Outlook 2022 Report Contact us now
"Another challenging year ahead, not without potential opportunities.
Three layers of tightening are expected, from the end of asset purchases to hikes in interest rates and even an outright reduction in the FED’s portfolio of financial assets."
Most major central banks have made it clear: the time of extraordinary support is behind us. Three layers of tightening are expected, from the end of asset purchases to hikes in interest rates and even an outright reduction in the FED’s portfolios of financial assets. Against such a backdrop, with inflation hitting levels unseen in decades, 2022 should be another challenging year for the fixed income asset class. The investors could face a double whammy of increasing yields and widening spreads. We remain cautious on the most defensive segments and on duration risk. However, should interest rates overshoot and materially exceed our year-end fair values, we are ready to buy back to secure yields for the future. In the meantime, we find selective opportunities within the EM universe, but selectivity is absolutely paramount.Global Investment Outlook 2022 Report Contact us now
"Slower, but still robust economic growth ahead.
Uncertainty remains high, and there is a risk of policy errors as central banks raise rates and embark on quantitative tightening. Nevertheless, the outlook for the GCC remains constructive this year."
2022 is certainly not business as usual when it comes to the economic and policy backdrop. We forecast global growth to slow but still remain higher than trend, with higher inflation the key challenge for policy makers and markets this year. Uncertainty remains high, with unpredictable high frequency economic data and a wide dispersion of forecast when it comes to central bank action. To that extent, we expect the US Fed to hike interest rates at least 4 times in 2022, and possibly more, as well as reduce the size of its balance sheet. With regards to oil markets, we are expecting a much more balanced outlook from a supply-demand perspective. Our fundamental view is for an average $70 a barrel for Brent this year, although geopolitical risks are contributing to higher oil prices currently. We expect a continued rebound for the GCC in both oil and non-oil sectors in 2022.Global Investment Outlook 2022 Report Contact us now
"The paradigm shift of the decade ahead.
The landscape is changing, from policy priorities to globalization, to valuations across asset classes, which limit the upside potential especially for liquid assets."
The 2020’s see a reversal of some of the key investment drivers of the previous decade. The landscape is changing, from policy priorities to globalization, and so are valuations across asset classes, which limit the upside potential especially for liquid assets. Taking a step back from the year ahead, this also impacts the long-term expected returns and risks. The two pillars of listed investment, stocks and bonds, are not immune and the traditional 60/40 allocation should not be paramount anymore. Solutions to successfully navigate the longer-term horizon include active asset allocation, alternative investments, as well as private assets, an area we are currently working on.Global Investment Outlook 2022 Report Contact us now