Setting the stage for 2022

In general, expectations in 2022 for risky assets, such as stocks, are for more moderate returns in comparison with 2021. Above-trend economic growth is still expected, but it will be in an environment where the US Federal Reserve will be hiking rates more aggressively than had been previously expected. We expect a first 25-basis-point hike as soon as in March, and a total of four hikes in 2022, with three more coming in 2023. Given that the pandemic is still causing lockdowns, the supply-chain crisis is not resolved and consumers are concerned about inflation, it is no wonder that market nervousness has risen.

At the latest meeting of the ABN AMRO Investment Committee, adjustments were made in the fixed income portfolio to return to tactical allocation weights and to reduce emerging-markets debt, while sector allocations were shifted in the equity portfolio. The overall allocation, however, is unchanged and continues to favour stocks (overweight) over bonds (underweight) with an allocation to hedge funds for more defensive portfolios.

Short-term dynamics and fundamentals continue to support stock investing, including ABN AMRO’s forecast for economic growth above historical levels and an outlook for positive earnings growth. But growth in the US is expected to eventually decline, as the Fed continues to implement tighter monetary policies and rate hikes.

The decision was therefore made to slightly reduce risk by shifting sector positionings to expose the portfolio to more value and defensive areas of the market in anticipation of future interest rate developments. Value exposure implies investing in companies that can do well in an environment of rising interest rates, while defensive sectors typically have a resilience that enables them to do well in various market environments.

After these changes, the sectors that we favour (overweight) are financials, health care and materials; the sectors that are out of favour (underweight) are communications services, consumer staples and utilities; and we have a neutral stance toward the remaining sectors: consumer discretionary, energy, industrials, information technology and real estate.

The outlook for bonds remains challenging, especially given the rising interest rate environment in the US. The European Central Bank, however, is expected to be on hold for some time, leading to a divergence in central bank policy rates.

We are taking advantage of the beginning of the year to reset some bond portfolio markers and have made adjustments in the areas of our high-quality bond portfolio (government and investment-grade bonds) as well as in what we refer to as our ‘’high return” bond investments (high yield and emerging-markets debt).

In short, high quality bonds are now rebalanced back to the desired percentage composition of the bond portfolio. Our tactical allocation remains the same. And, in the high-return portion of the bond portfolio, the decision was made to reduce the allocation to emerging markets debt. Some of this reduction has already occurred due to emerging-markets bonds having moved lower. We are less optimistic regarding opportunities in emerging-markets debt, given rising interest rates in the US. The high-return portion of the portfolio is now evenly split between high-yield bonds and emerging-markets debt.

The next act for markets, the coronavirus and ourselves is at hand, as we transition back to more normal times. The era of muted inflation and “lower for longer” interest rates has come to an end and we hope also to see the end to lockdowns owing to a raging pandemic. With our latest shifts in the portfolio, we are taking the first steps in preparing for what comes next.

Richard de Groot
Chair, ABN AMRO Global Investment Committee