Looking forward to 2022
Despite the key risks of covid variants and inflation, the outlook for 2022 remains positive for investors. The markets have so far weathered fairly well the US Federal Reserve’s new view that the rise in inflation is here to stay. The Fed plans to stop its accommodative bond purchases in March and has signalled that there will likely be three rate hikes next year. In broad lines, the monetary policies of the Fed and the European Central Bank (ECB) are expected to diverge in 2022, with the ECB avoiding rate hikes until at least 2023.
For both the eurozone and the US, we expect above-average growth next year as economies continue to recover from the impact of lockdowns and the pandemic. And, while uncertainties related to inflation and the coronavirus will continue for both regions, we believe that these risks are manageable. In this environment, the ABN AMRO Investment Committee made no change to its asset allocation at its latest meeting. Stocks continue to be favoured (overweight), while bonds are out of favour (underweight), and hedge funds are suggested for more defensive portfolios.
Positive environment for risky assets
It remains a positive environment for risky assets such as stocks, although the return potential has declined. After a strong acceleration in 2021, earnings expectations are now significantly lower, with earnings growth of around 7% expected in 2022. And, despite the Fed starting to hike rates next year, the interest rate environment will remain supportive for a time, as the Fed will be lifting rates in small steps from very low levels.
In recent weeks, equity market volatility has risen, driven by inflation fears and the uncertainty surrounding the omicron coronavirus variant. We expect equity markets to continue to be volatile, in line with news flow over market risks.
Bond markets remain challenging
An environment of rising rates creates challenges for bond markets. Core eurozone government bonds still have negative yields and we suggest continuing to avoid them. Instead, investors should focus on the diversification benefits and higher yields found in riskier bond segments, such as high yield and emerging-markets debt. For the latter, we suggest hedging duration in order to mitigate the impact of higher US interest rates. Investment-grade corporate bonds are also preferred, as default rates continue to be low. High inflation, however, will likely lead to bond market volatility.
Conclusion
Investors will be starting the new year on a solid footing. In Europe, we expect growth to revive in the first quarter of 2022 and to remain elevated all year long. Pent-up demand and the recovery of the labour market will drive this growth, which will also continue to be supported by fiscal and monetary policies. In the US, we expect growth to come from the easing of the supply-side bottlenecks that have dogged the recovery and also driven up inflation. President Joe Biden’s infrastructure plan is also likely to lift infrastructure and renewable energy investments, while corporate investment will be boosted as inventories are restocked.
Markets in 2022 are expected to be volatile, given that significant risks remain. The coronavirus is not yet defeated and the after-effects of global lockdowns are still apparent. Market nervousness is also expected as central banks around the world begin to signal or to implement less accommodative monetary policies.
For more information on our Investment Strategy, read the 2022 Investment Outlook.
Richard de Groot
Chair ABN AMRO Investment Committee