Global markets
The final months of 2021 brought a heightened degree of uncertainty and volatility for investors as they contemplated the tectonic shifts in key underpinnings of the equity market’s strong performance since the “COVID Crash” of 2020. Rising inflation, as well as supply-chain issues driven by sharply growing demand from consumers and businesses, have pushed central banks to start winding down monetary stimulus programs and to contemplate raising interest rates. Importantly, the arrival of the new and highly virulent COVID-19 variant Omicron has resulted in governments re-imposing measures to contain its spread.
Canada
The emergence of Omicron has tempered what was an increasingly positive economic outlook, but there is still optimism that 2022 will still deliver strong growth and further progress towards post-COVID normalization. We expect earnings growth to come from all sectors, with Industrials, Energy, Consumer Discretionary and Information Technology the biggest contributors. Inflation pressures and supply-chain issues could weigh on profit margins and growth expectations, though we continue to see evidence of costs being passed through to consumers in the form of higher prices.
United States
Proof that supply-chain issues and inflation are tamping down economic growth became evident as 2021 came to a close, with third-quarter GDP growth dropping substantially from the first two quarters. But there is still a strong base of support from consumer spending, given increasing job growth and unusually high consumer savings levels. However, the Omicron variant and gradually reducing fiscal and monetary support is expected to slow economic growth to between 3% and 4% in 2022. Elevated fiscal spending, and infrastructure and business investment, should provide a positive tone for equity markets in the year ahead.
Europe
The gradual economic improvement over the last year was side-swiped by Omicron, as many nations were forced to re-implement measures to control its spread. Tourism, a major driver of the region’s economies, dried up. For investors, we expect earnings growth across Europe to fall back to a more normal 7% to 9% in 2022 from the extraordinary 45% pace that followed the recovery from the depths of the pandemic.
Emerging Markets
Emerging-market equities have been negatively affected by the weak performance of China, which accounts for about a third of the emerging-market benchmark. Many nations have been hard hit by Omicron, just as their economies were starting to turn the corner. The expected drop-off in tourism and the increased likelihood of higher global interest rates will add to the pain. Asian growth is likely to continue rising gradually, and domestic demand will likely catch up to exports as a growth driver, likely led by South Korea and India.
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