Birdseye view of the market – 2022 Economic Outlook

As 2021 comes to a close, we look at some of the top research to give us an insight into the key trends to watch for the year ahead.

Interest Rates

There is definitely a common theme of central banks tightening rates during 2022. While the expectation of the number of rate increases might vary (between 1 and 3 increases), there’s no analyst that we looked at that thought rates will remain steady through the year.

That has a few potential impacts. While a slow, and small, increase is already being expected by the market (and being priced into 3 year bond prices), if we get increases quicker than expected it has the potential to dampen market returns.

Slower Growth Outlook

After a year of recover, most analysts believe the growth rate has peaked for more than 50% of the world economies. With the risks presented by supply chain issues, inflation, interest rate increases and Covid, there is downside risk to company profit margins.

Fully Valued Markets

If markets looked cheap, then the risks highlighted wouldn’t present a big issue. The problem is, as you’ll see in the video rundown, most analysts see our markets as being relatively ‘fully valued’ (or as one research piece put it ‘Priced to perfection’). In light of this, we approach investing in 2022 with a tempered view, inclined to invest in stages rather than all at once in order to reduce timing risk, and focus on diversification.

Active over Passive

You’ll also notice a theme of divergence in performance, or the widening gap between performing and under-performing investments. In our view, this presents more opportunity for active investment managers over passive, index style investing. This extends to fixed interest, where the risk of interest rates increases also suggests a shorter duration portfolio is appropriate.

Opportunities

All the risks aside, there are still opportunities to explore.

• Growth in Japan, parts of Europe, and developing countries has not yet peaked,
• Healthcare and cyclical recovery sectors show relative value,
• ESG style investments have the potential to benefit from both increased investment and technology advances. We have certainly seen a number of funds managers in the last 12 months put more focus on sustainability within their portfolios.