The two-year-old COVID-19 pandemic has left its imprints on society, yet markets have been rather resilient. For 2022, we anticipate another good year for equities as long as the U.S. and global economies can avoid recessions.
Our team of analysts and strategists in the U.S., Canada, Europe, and Asia recently published the Global Insight 2022 Outlook, which sets forth RBC Wealth Management’s views on the economy, equities, and fixed income, as well as forecasts for currencies and commodities. We also address two defining topics: the green energy transition and China’s economic evolution.
Over the next year, we think the path of markets will largely be determined by the path of major economies:
- The U.S. and global economies should deliver above-trend growth once again in 2022, albeit at a less robust and possibly bumpier pace due to lingering COVID-19, inflation, supply chain, and labor market pressures.
- Currently, all six of the major U.S. leading economic indicators we follow are signaling that this expansion has further to run. Recession risks are quite low. Powerful tailwinds are pushing forward the U.S. and most developed economies.
- Inflation, which has spread to all regions, is one of the key challenges facing policymakers.
- Central banks will aim to right-size policy support in 2022, and the process of dialing back accommodation with rate hikes and other measures will be about finding the right balance.
- Uncertainties about inflation and the pace of rate hikes could generate market volatility at times.
Following are highlights from the 2022 Outlook (clicking on the section titles will take you directly to each feature article):
Until well into 2023 we think the trajectory of the world’s major economies will be shaped by the remaining effects of COVID-19 stimulus and the normal progression of the business cycle. This phase should be good for corporate earnings and equities. Credit conditions are very “easy,” excess savings and pent-up demand should keep households spending, inventories are low and need to be rebuilt, and strong capital spending should persist.
Could the Fed and other central banks spoil the party? Yes—eventually. But before that happens, monetary conditions would have to transition from “easy,” what we have now, all the way to “tight,” which is some considerable distance down the road.
Beyond 2023, the COVID-19 policy-driven effects should quickly wane, leaving growth of the labor force and increases in productivity to drive the economic bus. This points to an extended period of slow GDP growth—perhaps slower than in the decade following the financial crisis. That, in turn, points to a period of intense corporate competition and even greater corporate concentration. Equities can be rewarding in such an environment. But owning the right ones and avoiding the challenged will be even more essential ingredients of success.
Over the past two years, companies have binged on debt as the average coupon reached new lows. But corporate debt levels can’t simply be looked at in isolation—it’s all relative. Debt levels haven’t strayed too far from long-term trends relative to GDP. Debt is up, but liquidity is improved with record cash on balance sheets, and interest costs are down. Companies could emerge from the pandemic in far better financial positions despite rising debt loads.
Investors should have exposure to both investment-grade and speculative-grade corporate bonds as part of a well-diversified bond portfolio. Over the near term, we see few credit risks for U.S. corporate bond markets, and little risk that the increased debt levels will act as the potential source of the next crisis.
The green energy transformation could require a grand economic realignment, at least rivaling the industrial and information revolutions. There is little doubt in our minds that the transition could be a boon for companies involved with the multi-industry infrastructure buildout.
But there are practical challenges given the serious gaps between net-zero ambitions and potential outcomes. The estimated price tag for the transition is substantial, between $94 trillion to $300 trillion globally between now and 2050. Furthermore, it’s unclear whether societies will tolerate the various lifestyle adjustments that could be needed to achieve governments’ carbon reduction goals, particularly if the transition process is costly for households and disruptive at times.
For now, we would focus on green energy transition investment opportunities that are likely to find their way to market in the next 5–10 years and are not as dependent on substantial, coordinated long-term government subsidies or private sector investments that have yet to be designated, or may not fully pan out.
Demographic and productivity challenges that emerged 10 years ago in China are likely to slow GDP growth to 3.5 percent in the 2040s, according to the World Bank.
The policy response has been broad. In its 14th Five-Year Plan, the government shifted emphasis away from unbridled pro-capitalistic growth to broader, more stable growth. It announced deleveraging and de-risking as one of its five core tasks for 2021. It coordinated a regulatory crackdown that will dent profitability initially but could reduce corporate concentration, and encourage competition. Finally, it is redirecting funds from infrastructure spending into productivity-improving investments, and the plan called for $621 billion for research and development in 2021, the largest allocation of any country in the world.
We see three key investment implications. We expect a greater appeal of domestic brands as conspicuous consumption is discouraged; a diminished outlook for industrial commodities due to reduced emphasis on infrastructure and the deleveraging effort; and another long stretch of tech-driven spending as productivity-enhancing investment by China is likely to encourage developed economies to respond.
This article provides a brief summary of investment guidance for 2022 for the U.S., Canadian, UK/European, and Asian equity and fixed income markets, along with forecasts for currencies and commodities.
We anticipate worthwhile global equity returns amid moderate earnings growth, supported by above-average GDP growth and strong consumer and business capital spending. Major central banks seem set to begin raising interest rates, yet equity markets typically perform well surrounding the first rate hike. We recommend starting the year with a moderate Overweight position in equities.
Central banks, inflation seen as the key risks for stocks in 2022
Survey question: What is the biggest downside risk to your main scenario?
Source - Bloomberg News survey of 106 asset managers worldwide between Dec. 3 and Dec. 13, 2021
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