Over the past two years, US indices have recorded gains that have compensated investors for the increased volatility that has occurred mainly due to the pandemic and the events that followed it. The beginning of 2022 found the US indices leading the returns with the two-year total gains being 47.5% for the S&P 500 and 87% for the Nasdaq.
In 2022, what will certainly be different will be monetary policy, as the Fed has already begun to significantly reduce its support for the bond market and is expected to proceed with at least 3 and possibly 4 interest rate hikes, as captured at least in markets and statements of Fed officials.
In this light, below we cite the estimates of various investment companies for 2022 and close with our own estimate. It is worth noting that several of these estimates were published even two months ago.
Schroders: The key is the pricing power of companies in 2022
Significant supply chain disruption in 2021 is expected to begin to improve in 2022. According to the historicity of such events, supply chain disruption tends to normalize abruptly and this is likely to occur in 2022. Already, the Baltic Dry Index is 64% lower than the October high.
Inflation will continue to be a significant risk for 2022, especially since most estimates for transitory inflation have failed and inflation is at 7.0%. The continuing lack of workforce is pushing up wages and this in turn increases production costs and reduces profit margins.
All of the above is a risk for stocks especially in America where valuations are not cheap. However, companies that have the power to pass the cost on to consumers will benefit as they maintain their profit margins increased.
The so-called mega-trends are expected to continue to attract investment interest. These include: climate change, energy transition, digitization, medical innovation.
Thornburg Investment Management: Increased risk of a possible aggressive interest rate hike
2022 is expected to be a year with higher volatility than 2021. Inflation is a threat that has been discounted by the markets, but the possible slowdown in growth has not been significantly discounted and this is a significant risk.
The gradual normalization of the supply chain is expected to lead back to the normal cycle of increasing / decreasing inventories. In such a reality, this development is an important factor of growth support. Asked if this process would be enough to keep GDP growth high, Thornburg remains bullish on the US economy and stocks.
Inflation is expected to be the key to market direction and volatility. This is because the Fed's denial to recognize the threat of inflation on time resulted in lagging behind the curve. This in turn makes it quite possible for an aggressive increase in interest rates, which is not positive for stocks.
A direct consequence of rising interest rates is that Growth stocks are not expected to be among the 2022 gainers, while things will be worse for growth stocks with high losses and no profits.
The prospects for bonds, which have historically proven to offer security in times of turmoil and also significantly diversify the investment portfolio, are also positive. Short-term issues as well as the selection of appropriate highly rated securities can make a significant contribution to a portfolio in 2022.
2022 is expected to present huge opportunities in emerging markets as well, despite the risks, growth is expected to be significantly better than in the US.
Robeco: We are looking for opportunities beyond the so far “usual suspects”
After many years of too loose monetary policy in developed markets, 2022 will be different. The Fed will raise interest rates and this is a major sign of strong economic recovery, while inflation will peak and then move to lower levels.
In a period of tighter monetary policy due to strong growth, it is observed that value assets and value stocks have the best returns. From this point of view, emerging markets, which have also discounted strongly negative news, have an increased chance of a good 2022. Simply put, emerging markets seem to be already well prepared for the change of monetary policy.
The gap in growth and value valuations in emerging markets is too big and this is not sustainable in the long run. This is an important factor for which value stocks in emerging markets could perform better in 2022.
Neuberger Berman: Volatility triggered by central banks
With inflation soaring, NB estimates that the Fed's actions will set the tone for real interest rates, the dollar and risky assets. NB estimates that inflation will fall but lower than most analysts expect, and therefore central bank actions will cause a significant increase in volatility during the year.
The first quarter of the year will clearly be an ongoing battle with inflation and monetary policy. The emerging market central banks have already adjusted their monetary policy and now the Fed and the ECB will be constantly under the watchful eye of investors. Although inflation is expected to deescalate, upward pressures in the housing sector are expected to keep inflation above 3.0% or more for 2022.
For 2022, the Fed, BoE and BoC are expected to proceed with four interest rate hikes. In general, interest rate hikes will be higher than analysts estimate and will put an end to the policy of "urgent" monetary support adopted after the outbreak of the pandemic.
The main investment issue is expected to be that of restarting the economy and the inflationary environment. Under these conditions, industries such as Materials, Energy, Industrials are expected to achieve stronger returns.
WisdomTree: Fruitful conditions for the markets and the economy
The key issues for 2022 are expected to be economic growth, inflation estimates, monetary policy and the growth rate of corporate profitability.
Consumption is expected to continue to be important in supporting growth, but in 2022 there will be no support from US government subsidies.
Another important factor that contributes significantly to economic activity is reserves. And while all eyes are on the supply chain disruption, the impact on reserves is being largely ignored.
WisdomTree maintains a strong preference for equities over bonds, putting above all Value stocks in America, EAFE and emerging markets and small-caps in the same geographical areas. More specifically, WisdomTree selects stocks with strong dividend yields that are in high demand during inflationary periods.
Lombard Odier: New phase of economic recovery in 2022
Long before the arrival of 2022, the markets began to worry about the problems of 2022 such as growth and particularly high inflation. A new phase of growth seems to be emerging with demand having seen its highest point and with growth returning to the long-term average.
The growth rate is expected to be one of the highest in the last 40 years with estimates for GDP in 2022 being at 4.6%. Both demand and business activity remain strong. Business profit margins seem to be resilient and allow them to boost investments as well as support their workforce.
Lombard Odier remains positive about the stocks in 2022 with a greater preference for European stocks, in value sectors but also in real estate. The overall stance remains in favor of investing in risky assets with the bank's portfolios fully invested, noting that any possible stock correction should be seen as an opportunity for new purchases.
J.P. Morgan: Rise for stocks – return to growth
After two years of uncertainty and lockdown that resulted in the largest drop in GDP in history, the outlook for 2022 is particularly positive. With the uncertainty of the pandemic declining, estimates for stocks and the economy are more positive.
2022 is expected to be a year of full economic growth with economic activity and global mobility returning to normal. This will create a strong cyclical growth with strong consumption but also an increase in business expenses.
For the above reasons, JPM remains positive for stocks, commodities and emerging markets and negative for bonds.
For stocks in particular, JPM estimates that the rise will continue, regardless if it will be more modest, due to better earnings per share estimates, improving supply chain conditions and improving macroeconomic background of emerging markets.
Despite the fact that the Fed has begun to reduce support to the economy through bond purchases, in 2022 there will be support of $ 1.1 trillion. in all developed markets.
For 2022, the target for the S&P 500 is at 5050 points.
Janus Henderson: The current market cycle is resilient
Inflation, lower growth and higher interest rates are the reasons for investors to worry in 2022. But the current cycle may prove out to be resilient.
The recession / growth phase of the economy in 2020 may have been the fastest in history and investors may have many reasons for concern, but the chances of a faster completion of the current cycle are not strong.
In 2022, growth still has a long way to go and investors will simply have to adjust their equity portfolio accordingly and not take defensive positions as the cycle is not yet complete.
The current phase of the business cycle favors stocks with a low P/E ratio while sectors such as financials, industrials, energy and materials are also expected to be favored.
Invesco: 2022 will be a transitional year
After huge government and banking support to markets and economies in 2020 and 2021, 2022 is expected to be a year where both markets and economies will return to normal. For 2022, inflation is the key question and the way central banks will handle it, will determine the reaction of the markets.
The baseline scenario is for growth to almost approach its long-term average and for inflation to de-escalate throughout the year. During this transitional year, Invesco expects stocks to outperform with strong quality data found in the consumer goods, technology, health, real estate and communications sectors.
Fidelity: A year characterized by a return to normalcy
Stocks’ returns are expected to be positive in 2022 but earnings are likely to be lower than in 2021 as earnings per share increase will be lower and the Fed will start raising interest rates.
If interest rates remain low, Growth stocks will continue to perform better, but central bank actions will have an impact on both the economy and equities.Most macroeconomic indicators confirm that we are in the middle of the cycle after the initial stage of development that followed the pandemic.
For 2022, although stocks are expected to perform well, it is difficult to predict exactly which sectors will have the best behavior as it largely depends on interest rates. In conclusion, stocks are still on an uptrend and if we follow the pattern of previous uptrends, then the S&P 500 could reach 8,000 in the next five years.
Blackrock: A new era without precedent
Another positive year for stocks and a fall for bonds. The strong restart of the economy is expected to be delayed due to Omicron, but it will not be derailed. Central banks will start raising interest rates but will remain flexible in terms of inflation rate at this stage.
For the second year in a row, stocks and bonds will close with different yields and this will lead to lower real yields, which is supportive for stocks. Although the general view is positive, the fact that there is currently uncertainty leads to a reduction in allocation to risky assets.
According to Blackrock, it is rare for stocks and bonds to close with a different sign, but now this is happening for two consecutive years and shows that a change has taken place. And according to its estimates, the factors that contributed to this continue to exist, a fact that forecasts something similar in 2022.
Stocks are still the first choice with Blackrock explaining that the new reality with green growth in the center of attention can help stocks stay on the uptrend.
XSpot Wealth estimate for 2022 - A year that could trigger a significant positive surprise
2022 is expected to be a different year from what we have been used to for at least the last five years. There is a similarity with 2018 when the Fed tried again to normalize its monetary policy, but this is where the similarities stop. The general macroeconomic background is significantly different today compared to some years ago.
The two biggest fears of investors for 2022 are inflation (and the monetary actions that follow it) and the omicron mutation. These two factors are the reason for concern of investors, which has become obvious since the first meetings of 2022.
In our view, the above two factors, and especially inflation, create a climate of uncertainty at least for the first quarter, as the more inflation does not escalate, the harsher the Fed's rhetoric, the greater the chances of an aggressive rise in interest rates (already the markets report 4 increases) and so this will negatively affect the markets.
We believe that a peak in inflation is not far off. The conditions that led to this rise will begin to normalize and there are already several parameters that have boosted inflation and have now been normalized. And as it happens every time a move is unilaterally intense, a corresponding de-escalation move follows. By this we mean that a move to lower levels is quite possible.
Already, shipping costs, the prices of some goods but also the increased demand, have declined and this is expected to be obvious soon enough. In addition, in 2022, Americans will not receive the state subsidy that had been channeled into consumption.
With markets now expecting up to 4 interest rate hikes, we believe that the foundation has already been laid for a revision of this estimate after each de-escalation of inflation. For us, this creates the conditions for a positive surprise in the markets and will be a first-class opportunity for a spectacular change in investment sentiment, a more aggressive return on rate sensitive assets and along with the circular placements there will be momentum for a significant move.
In any case, volatility will have frequent fluctuations and will create pressures in the markets that we believe we should take advantage of.
The trend towards the energy, financials, consumer staples sectors is already obvious, but we should by no means neglect the technology sector and especially the largest companies in the industry because they have characteristics such as: leading position in the sector, strong balance sheets and strong pricing policy. Features that match the uncertainties of the time.
The initial fear of the omicron mutation is a thing of the past and everything shows that with each passing month the real economy will be driven closer and closer to normalcy. With the fear receding and new vaccines expected in March, the pandemic seems to be degrading as a risk factor and this will be another parameter in boosting investment sentiment.
The technology, banking and health sectors continue to be an important allocation in our aggressive portfolios.
This document does not constitute and shall not be construed as a prospectus, advertisement, public offering, or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. This document is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction.