Perspectives - Outlook 2022

Flexibility in portfolios will be key to navigating the fully charged environment in 2022.

The chameleon is a wonderful reptile that is commonly associated with an ability to change colour to adapt to its environment. However, chameleons also have eyes that can pivot and focus independently of one another, allowing them to observe two objects simultaneously but also providing a full 360-degree arc of vision. Adaptability and a broad range of vision are traits that will prove useful to investors in 2022, as uncertainties run high and the potential for sudden escalation ranges from health issues to geopolitics.

Covid remains ever capable of delivering negative surprises suddenly and rapidly, although hopefully less severely following the advent of vaccines and antiviral remedies. Precarious geopolitical tensions across the globe could also deteriorate at a moment’s notice. And if markets detest something as much as uncertainty, it is surprise.

Central banks around the world sit at a major crossroads. Post-pandemic growth and employment has rebounded strongly in many key markets as the vaccine rollouts have unshackled economies. After years of ultra-loose monetary policy, central bankers in the US and UK have indicated that their economies are ready for a withdrawal of that life support. What the outcome will be introduces another uncertainty for markets in the year ahead.

However, 2022 could also bring some positive surprises. The pandemic created a profusion of savers, from the US and China to Europe and Japan. Economic growth would get a boost should they start spending even a fraction of this savings stockpile.

Surprises aside, supply bottlenecks should slowly ease over the course of the year, reducing upward pressure on the prices of goods. But more rapid wage growth could drive prices higher, especially in the US. So inflation that has been transitory in nature so far could become more static.

As the world shifts to a net-zero greenhouse gas emissions pathway, current investment in clean energy is not sufficient to meet the requirements necessary, so we can expect continued reliance on traditional energy sources and the potential expansion of nuclear during the transition.

Our central scenario holds that the current cycle is set to continue. With low inventory levels across key sectors, we expect a positive year for returns, with equities and alternatives (especially real assets) taking the lead in the given environment. In particular within the former, companies with pricing power – the ability to pass on rising costs to their end customers – are well positioned. In this fully charged environment, we must remain flexible and tactical in our portfolios, which is why 2022 will be the year of the chameleon.

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