General outlook for 2022: Adjusting your investment expectations
During the summer holidays, as usual, I worked through the financial reports released by most of the large investment houses outlining their outlook for the new year. So, I had to refrain from using the title ‘Outlook for 2020 too’, seeing that it already looks like we’re in for ‘more of the same’. The reality is that Covid-19 is still very much part of our lives, and in all likelihood will keep making the headlines in 2022. In this context, it is important to adjust your investment expectations for 2022 accordingly. Most of the large investment firms share a number of opinions/forecasts, which I would like to cover in my column this week.
According to the IMF’s most recent World Outlook released in October 2021, the global economy is expected to resume an average growth rate of 4.9%, continuing to support the recovery – a view shared by most investment houses. As JPMorgan Chase (JPM) so aptly put it in my view: “Supply-side pressures have intensified as supply chain issues and persistent bottlenecks have led to pent-up demand and excess savings. Despite this stiff test, J.P. Morgan Research continues to see global growth accelerating in the final quarter of this year (2021), as it displays the strong underlying fundamentals that will sustain above-potential growth for 2022.” In line with JPM’s view, Credit Suisse also foresees solid economic growth for 2022 stating: “Strong goods demand should result in a pickup in production once supply chain problems start to ease.”
Inflation remains the biggest concern for 2022, and with good reason. Higher inflation may cause interest rates to rise faster than expected worldwide, which may definitely dampen the economic growth expectations outlined above. Most investment firms don’t foresee inflation levels being reduced overnight to below pre-pandemic levels, and believe supply chain bottlenecks may continue. Most of them believe a repeat of the 1970’s inflation scenario is unlikely, expecting inflation to end 2022 at a lower level than at the start. However, they don’t foresee a return to pre-pandemic levels in 2022. As BlackRock put it: “We had flagged inflation and now we’re living with inflation.” Let’s hope they are right, because if not, the central banks will have to act faster to hike interest rates.
This brings us to the next point. Most investment firms don’t foresee any extreme reaction from developed markets’ central banks, only expecting interest rate hikes at the end of 2022 as opposed to H1. Goldman Sachs summarised it well in their outlook: “By the time Fed hikes get underway, some advanced economies (including the UK and Canada) should be well into the interest rate normalisation process, and a number of economies in Latin America and Eastern Europe may already be approaching its end. By contrast, we think the ECB and RBA are still far away from hiking rates, and markets seem to have overshot in their expectation of an imminent hawkish turn.”
One may add South Africa to normalising economies such as Latin America and Eastern Europe, which became evident with the SA Reserve Bank having already announced the first interest rate hike (0.25%) in November 2021.International fixed interest investments
Most investment houses agree that this is definitely not the area on which to focus your investments for 2022. As Credit Suisse put it plainly: “Government bond yields will likely deliver negative returns in 2022.”
Although most investment houses believe the ‘easy money’ was made in the recovery process, equities should still outperform most other asset classes in 2022. However, differing views reveal unmistakable discord. Most do believe developed markets are the place to be, compared to emerging markets like South Africa, although there is major concern about the US. Expectations are that the S&P 500 will deliver marginal growth at best. Morgan Stanley made it clear that their “strategists think the S&P 500 Index could decline 5% in 2022 while other developed markets could end the year higher”. However, there is a clear consensus about value stocks. BNP Paribas’s view is: ”The wide valuation gap between value and growth stocks and the prospect of higher interest rates suggest upside is ahead.” Vanguard agrees that “for US investors, this modest return outlook belies opportunities for those investing broadly outside their home market” and if you have/want to invest in the US, they “think value stocks are still more attractive than growth stocks, despite value’s outperformance over the last 12 months”
This brings me to the last topic covered by most investment houses.
If you’ve thought the commodity run has moved beyond its peak, think again. Most investment firms believe the general demand for commodities should remain high in 2022 – of course, something that will benefit a country like South Africa and a currency like the ZAR. As JPM put it, short and sweet, in their 2022 outlook: “Despite a late-November setback, commodities are set for a strong year ahead.” Although not all the investment houses are convinced that precious metals are set to deliver a scintillating performance in 2022, there is consensus that oil is the commodity offering the best value. Morgan Stanley believes oil “could top $90 a barrel in 2022 as rising demand meets relatively spare capacity”.
In closing, it’s worth pointing out that even big investment houses don’t always get it right. And even if their forecasts do seem correct for 2022, it’s always advisable to consult a financial expert about your situation to help you maintain a sound balance between opportunities and risk management.