What will be next? Will 2022 offer investors a break and give them a break to get their portfolios in order? How can we identify new trends and guide investments accordingly? Let’s take a look at the different asset classes and discuss the prospects and challenges in 2022.
Inflation: Less transitory, but controllable
Inflation continues to surprise to the upside, causing a stir in the bond markets. While the Upcoming figures may remain high and volatile, there are good reasons why inflation decrease over the next twelve months. With signs that current supply chain problems have reached their limits and commodity markets are appreciating higher energy costs, inflationary pressures will ease throughout 2022.
Still, vigilance is key, as we cannot entirely rule out that we will have to deal with higher inflation for longer. In fact, inflation is widening, which means that – towards 2022 – volatility will remain high and could take a little longer to reduce.
Equities: Do not be short-term
On the equity side, supply chain bottlenecks They have become commonplace in business communication: Semiconductor production problems have paralyzed several industries, and transportation constraints are trapping companies around the world. To top it all, oil and gas prices portend a costly winter. Low inventories and delicate relationships with Russian suppliers add more fragility to markets.
These headwinds are affecting equities “risk / return” balance as we enter the new year. Some short-term turbulence is expected in the first months of 2022.
However, these bleak prospects need not deter the sensible investor. In fact, medium-term prospects are much more positiveas the fundamentals offer opportunities to remain bullish. Excess saving should boost consumption, business investments are on the mend, and we have not yet experienced the full impact of the fiscal stimulus packages.
Central banks will remain prudent not to tighten monetary policy too early or too aggressively. Investors welcome a simple normalization of official interest rates, which should not cause a significant correction in equity markets.
European markets in particular offer fertile ground for growth in the coming months. Unlike their American counterparts, European equities remain mid-cycle and reasonably cheap. Furthermore, Europe is the main beneficiary of the vaccine rollout and benefits from the sustained accommodative monetary policy of the European Central Bank. But nevertheless, we also don’t completely rule out US equities. Betting against the large number of innovative and disruptive companies in this market, and the tax aid from the administration, seems unwise.
We are cautious when it comes to Asian emerging marketsand from China in particular. The latter is currently grappling with an economic slowdown, potential liquidity situations in the real estate sector, and strict government regulatory oversight over some of its largest companies. This cocktail of risks generates a lot of uncertainty and low valuations. Until we have more clarity on the intentions of Chinese policy, we remain cautious.
Fixed income: an attractive diversifier
Lastly, let’s take a look at fixed income. In the case of public debt, in DPAM we do not believe that the upward risk of interest rates is so high. Central banks are likely to remain undemanding. We do not expect any aggressive interest rate hikes to counter the recent surge in inflation, which limits upside risk. Inflation expectations could rise further, but a lot has already been discounted.
Are constructive with respect to the European periphery, but we are still cautious about the core (eg Germany, France, Netherlands). Therefore, within Europe, we improve earnings while maintaining a bearish duration profile in the core. Regarding US government debt, we are underweight. However, value has been created here as nearly five interest rate hikes have been discounted. America is interesting again, although we would like to see the Fed’s policy stance clarified before we fully commit.
In Emerging Market Debt (EMD), We See Some Interesting Opportunities. Our team believes that real interest rates will start to turn positive in 2022, which would stabilize the currency markets in emerging markets and offer some potential opportunities in the new year. Also, while we remain cautious on Chinese equities, their government debt looks attractive. Given the macroeconomic outlook, policy tightening is off the table, making current performance very attractive and prone to a downtrend.
We are more neutral when it comes to corporate credit. Spreads are unlikely to narrow beyond current levels, but we don’t see a strong widening either. A smaller offering will provide support to the asset class, making it an ideal base and diversifier for the multi-asset portfolio. Communication from the European Central Bank will be crucial as we seek more clarity on how investment grade (senior) bonds will be incorporated into the asset purchase program.
In conclusion, fixed income is still a diversifier, but you have to invest selectively. We turn to new havens such as Chinese bonds for diversification, emerging markets and the periphery for performance, while we hold onto US Treasuries for risk hedging.