The new year will be marked by a return to normal, Tilmann Galler from J.P. Morgan Asset Management says.

After a second pandemic year, investors are looking forward to 2022 with a mixture of hope and concern. 2021 was a highly accomplished year. With global GDP growth expected to be 5.8 percent, the world economy has grown at its strongest rate since 1973.

At the same time, the average key interest rate was 0.13 percent in industrial economies. Can interest rates be expected to turn around in the new year? J.P. Morgan Asset Management’s capital market strategist Tilmann Galler has developed 10 hypotheses to help investors navigate the new year.

1. Growth Will Be Above Trend – But Not as Strong

The markets were sent into freefall by the pandemic before they came roaring back. «Some momentum is spilling over into 2022, but we expect things to return to normal», Galler says. Although purchasing manager indices continue to improve and the investment environment remains bullish in many industrialized countries, government stimulus will have less of an impact than in 2021.

This will slow down growth momentum. But private savings should not be overlooked, given how wealth expanded enormously during the pandemic, while debt shrank sharply.

However, there is still some uncertainty surrounding the pandemic, which keeps shifting the parameters and which will have an impact on growth. «We are now seeing some seasonal trends take hold, with economic activity shrinking during the winter before making up lost ground when it gets warmer», Galler explains. The current slackening could therefore be producing deferred demand that would be released in the second or third quarter.

2. Asia Will Celebrate a Comeback

Asia failed to live up to expectations last year. Economic performance was especially weak in China going back to early 2021 when the «monetary policy belt was tightened» in order to eliminate social inequalities. But the entire ASEAN region continued to suffer from the pandemic in 2021, not least because of its dependence on tourism.

«For 2022 we expect a comeback, at least in northeast Asia. Although China will focus on growth of a more sustainable nature in the future, in the short term we are seeing more fiscal action to prevent a hard landing. The situation should also improve in Southeast Asia and the ASEAN region. The main fundamental growth themes that will mark the decade in Asia remain in place despite temporary upheavals. Lastly, Japan is currently displaying a remarkable acceleration and lots of pent-up demand, which should have a positive impact» Galler says. From an investor's point of view, it’s an interesting time to approach the region again.

3. Inflation Will Run Out of Steam

Inflation momentum is likely to subside in 2022, but even if inflation rates fall, they are likely to remain above levels that central banks are comfortable within the medium term. Not all inflation components will decline. The labour market, for example, is likely to show higher inflation rates. «Labour shortages are forcing companies to pay higher wages and they will pass on their higher costs to consumers as much as possible. This wage-price spiral will drive inflation higher. Falling unemployment and higher wages are also showing up in apartment rents», Galler adds.

4. Central Banks Change Course – an Initial US Interest Rate Hike

Inflation trends are also likely to cause central banks to shift back to more normal monetary policy. «They are already taking their foot off the gas and supplying less liquidity», Galler explains. The Federal Reserve and Bank of England are likely to raise interest rates in the coming year but will probably have to do so very carefully in light of the pandemic.

5. The Anchor Will Come Loose on the Short End – Yields Will Rise Across the Board

With the start of normalization in monetary policies, the yield curve will shift upward. «We, therefore, expect duration to remain under pressure in the coming year but on a broader front – not just on the long end, but also on the short end», Galler says.

6. Corporate Bonds Will Outperform Government Bonds

«Because company earnings are so strong, we expect corporate bonds to continue to outperform government bonds, with momentum spilling into 2022», the capital market strategist says. This is reflected in the downward trend in high-yield defaults in 2021, a trend that is likely to hold up in the new year.

7. Company Earnings Will Rise, But Margins Will Shrink

Galler is confident: «While the best quarters are probably behind us, company earnings are likely to continue rising. That being said, companies are feeling the cost-side pinch more and more, and are noticing a squeeze on margins.»

8. Value Will Beat Growth – Dividend Yields Will Be More Important

Amidst stubbornly higher commodity prices and rising interest rates, Value stocks could outperform in 2022. After three calendar years with some strong share price gains, weakening earnings momentum is likely to drag down future potential. Dividend strategies are likely to play a larger role in the new year.

9. Volatility Will be Higher Than in 2021

Galler expects volatility to be higher in 2022, as monetary and fiscal policies move back to normal and as growth weakens vs. the previous year. The markets could be kept even more on edge by the imponderables of the pandemic and geopolitics. «Macro strategies are an alternative source of diversification, particularly amidst increased market volatility», the economist notes.

10. The Energy Transition Will Drive Commodity Prices

Are energy and commodities companies part of the problem or of the solution? Regardless of the answer, the energy transition that has been proclaimed will come at a price. According to estimates from the International Energy Agency, it will require annual financing of 1.6 trillion euros out to 2030 to expand alternative energy generation and new infrastructure. This also has market implications.

Stricter regulation of fossil fuels has reined in investment in this segment and in raw material extraction. And yet, demand for raw materials is rising – precisely because of the energy transition. Without the necessary raw materials, it will be hard to meet the net-zero targets. To be a part of the solution to climate change, raw material companies must continue to be supported with capital to meet their growing demand for commodities and to make future production the least harmful possible.

  • The full Investment Outlook 2022 can be found here.

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