Although stock markets are expected to be positive in 2022, returns will be more subdued and risks will increase as central banks begin to withdraw liquidity, said Johanna Kyrklund, chief investment officer and global head of multi-asset investments. at Schröders.
Fund managers tend to have a pretty miserable disposition because even when performance is strong you inevitably worry about how you are going to generate returns in the future. After such a strong year for the markets, this concern is even more pronounced. In 2020, vaccine announcements inspired confidence in a “reopening trade” that offered high returns with limited risk.
Looking at our models, we are now entering a more mature phase of the business cycle when growth momentum peaks and central banks begin to withdraw support. Against this backdrop, we expect equity returns to be more subdued but still positive, supported by strong corporate earnings.
What are the main risks from this point of view?
Inflation is a popular theme, and we agree that in the medium term we are likely to be in a more inflationary environment compared to the last decade, driven by rising wages, de-globalization and decarbonization.
In the shorter term, we expect inflation dynamics to peak as supply bottlenecks ease, but central banks should still raise interest rates.
At the equity level, it is important to identify companies with pricing power given the risk to profit margins posed by higher input costs and wages, as they will be better placed to to face. storm.
However, we do not yet believe that inflation represents a systemic risk for the markets, as the willingness of central banks to start raising rates in response to inflationary pressures should contain inflation expectations.
Omicron variant of Covid-19 remains a concern
The Covid-19 continues to cause volatility, the latest variant, Omicron, renewing these concerns. It’s important to take a step back and recognize that we’ve come a long way since Q1 2020.
Immunity levels are considerably higher, even in the face of mutations; governments have become more experienced and react faster, and the processes for developing new vaccines are increasingly efficient and streamlined. Market players have also developed a framework to take the virus into account.
We’ve come a long way since the extreme uncertainty of early 2020. Nonetheless, early indications suggest that Omicron may escape some of the protection offered by vaccines, which is already leading to partial blockages.
It will be a slow start to the year in terms of growth.
In an ideal world, we would see a strong synchronized global economic recovery that would allow us to turn to more cyclical and cheaper exposures. The appearance of Omicron makes this less likely.
The only area that might surprise is China where, unlike other major economies, politics is getting stimulating.
Opportunities remain, but we must not exceed
Our greatest concern is that we need to focus on trends that are old and rather tired, and in danger of exhaustion: American exceptionalism (the idea that the United States is viewed, both nationally and internationally, as superior to other nations) and the relentless search for returns.
Given our anticipation of a possible rise in bond yields, we believe it is too early to take advantage of the mean reversion opportunities, however juicy they may appear, and we must resist the temptation to oversteer.
With budgetary aid slowing, the private sector will have to take over from growth
In recent years, we have compared the global economy to a ‘wobbly bike’, where a lack of economic dynamism has made us vulnerable to a possible deviation from the path of the wind. The pandemic has forced governments to put stabilizers on the wobbly bike, giving us some breathing space from cyclical volatility.
These stabilizers will collapse in 2022 and the private sector will have to take over from growth.
My more technical colleagues would describe the potential distribution of results as “platykurtic,” a more moderate benefit with high risks. In simpler terms, diversify your risks – now is not the time to make big bets.
- By Johanna Kyrklund, Chief Investment Officer and Global Head of Multi-Asset Investing at Schroders
Read: Why 2022 could be a tougher year for South Africa: economists