Investment Trends for 2022


Through John Manning, international banker

Jhe arrival of Omicron has, once again, put a damper on the work by subduing hopes around the world for an imminent end to the pandemic and upsetting economic and financial forecasts for 2022. Indeed, the uncertainty extra that this latest coronavirus variant brings has been frowning on investors around the world.

With the pandemic expected to continue to play a hugely influential role in 2022, one would assume that the world’s largest central banks would maintain their expansionary monetary policies for at least part of the year. But with inflation accelerating and labor market tensions mounting in the United States, we could soon see an end to the lowest interest rates and large-scale asset purchases.

Fitch Ratings, meanwhile, expects the U.S. Federal Reserve (the Fed) to raise interest rates twice in 2022 and four times in 2023, bringing the upper limit on the federal funds rate to 1.75. % by the end of 2023, compared to 0.25% currently. Meanwhile, banking giants such as JPMorgan Chase, Goldman Sachs and Deutsche Bank have taken an even more hawkish approach, each predicting a total of four rate hikes being implemented this year.

“We believe Fed officials are coming to the same conclusion that the labor market is very tight, making it difficult to delay the first hike until June, our previous call,” Michael Feroli noted recently. US Chief Economist of JP Morgan. . As such, the bank advanced its forecast for the Fed’s first rate hike from June to March and said it expects another hike in each of the next three quarters of the year. Should such a scenario materialize, other central banks may well follow the Fed’s lead, including the European Central Bank (ECB) and the Bank of England (BoE).

It seems increasingly clear that the persistence of COVID-19 into 2022 has serious implications for investors.

Shares

Despite the accelerating price environment and the persistence of coronavirus cases, equity markets continued to thrive in 2021. Indeed, the single-digit gains initially announced for the year eventually turned into a rise of nearly 27% for the S&P 500 index. . But can stock markets kick off and deliver similar returns this year?

The general sentiment so far in 2022 appears to be one of cautious but moderate optimism, with most analysts anticipating more modest gains than last year as the impending monetary tightening cycle has a significant dampening effect. And with valuations already very high for most sectors, it becomes difficult to justify a further rise of a magnitude similar to that seen in 2021.

“Slowing economic growth, Fed tightening and rising real yields suggest investors should expect slightly below-average returns next year,” Goldman Sachs said in late 2021. “Unlike In line with our expectations over the past year, corporate tax rates will likely remain unchanged in 2022 and increase in 2023. Corporate profits will rise and push stock prices higher. .

As such, it can be more difficult to pick individual winners in this climate. “While overall index earnings remain sustainable, there will be a greater dispersion of winners and losers and growth rates will slow significantly…2022 will be more about stocks than sectors or styles, in our opinion,” noted Morgan Stanley.

Obligations

Traditionally, bonds are considered among the safest asset classes, offering higher returns than simply holding cash. They also provide bondholders with steady streams of income and can be crucial buffers in portfolios when other, riskier assets decline.

However, bond markets in many countries fared poorly last year. Despite accelerating inflation in a number of advanced economies, bond yields have not risen as much as expected. This suggests that bond traders characterized this particular surge in inflation as temporary, with price increases expected to slow over the next few years. Additionally, with banks currently overwhelmed with cash, many financial institutions have invested generously in long-term debt, which has only added further downward pressure on yields. Many also expect bonds to remain under pressure in 2022 due to rising interest rates as most of the world continues its economic recovery from the pandemic.

That said, corporate bonds can be a prudent investment in 2022. Because they trade at higher yields than government bonds (like US Treasuries), investors will be compensated more generously by investing in them. exposure to the mid-term corporate bond market. Indeed, while the 10-year US Treasury currently yields around 1.75%, the average yield on BBB-rated corporate bonds is around 100 basis points higher.

Indeed, conventional investment-grade corporate bond funds attracted $2.9 billion of investor interest for the week ending Jan. 6, which is the largest weekly inflow for this asset class. since early July, according to Refinitiv Lipper, illustrating the renewed interest in this particular market. “Over the past year, interest rates have risen the most among mid-term bonds,” Dave Sekera, chief US market strategist for Morningstar, wrote recently. “But from there, we expect mid-term bonds to offer the best yield with less price sensitivity to changes in interest rates compared to longer-term bonds.”

Real estate investment trusts

With various moratoriums imposed to help tenants who have struggled to pay rent during the pandemic, the past few years have been difficult for real estate investment trusts (REITs). Their performance – and the performance of real estate in general – has also come under pressure from additional pandemic-induced mandates, which have confined people to their homes for long periods of time, limiting their ability to shop, work, learn and socialize.

But by the end of 2021, tenants had generally resumed their payment obligations, while real estate occupancy of properties such as offices and hotels rebounded strongly. This helped REITs end last year on a promising footing. And with global gross domestic product (GDP) and employment levels expected to continue to rise solidly this year – JPMorgan Chase said it expects developed market GDP to reach pre-COVID-19 levels. COVID before the end of this year, for example – these macro gains should bode very well for REITs in 2022, with the added ability of businesses and landlords to raise rents on new and existing leases underpinning much of the rejuvenation .

According to Toronto-based Hazelview Investments’ 2022 Global Public Real Estate Outlook Report, the target total return for global REITs in 2022 is 12-15%. “From a valuation perspective, global REITs entered 2021 at their most attractive level relative to global equities in nearly two decades,” the report noted. “Even with +20% gains over the past 12 months, global REITs enter 2022 trading more than one standard deviation below global equities, which is its second-lowest level outside of the low of the pandemic period.”

Cryptocurrencies

often called digital gold, Given its finite and fungible nature, bitcoin has long been considered to have similar qualities to gold and other precious metals, namely, being an effective store of value and a hedge against inflation. These benefits could prove crucial for investors’ portfolios this year. And with the U.S. Securities and Exchange Commission’s (SEC) end-October approval of the first futures-based bitcoin exchange-traded fund (ETF) in the U.S., investing safely in the leading digital currency in the world continues to become more convenient.

That said, it may well be tempting to conjure up the prospect of an emerging bear market for the cryptocurrency sector in 2022. With bitcoin nearly touching $70,000 in late 2021 and steep declines having historically followed markets bulls similar to the current one which started almost 18 months ago, one could suspect that another collapse is on the horizon, especially as we expect to see a cycle of monetary tightening being decreed by the Federal Reserve and other major central banks this year.

“We are optimistic [on] Long-term Bitcoin, based on our long-term trend-following gauges,” said Katie Stockton, Founder and Managing Partner of Fairlead Strategies LLC recently. Bloomberg. “We assume the long-term uptrend will hold, and a more decisive break to new highs would allow for an impressive projection of measured move around $90,000. For now, a corrective phase is still underway, although that there are potential signs of short-term exhaustion.

Aside from bitcoin, several blockchain-related developments in recent times suggest that many projects have the potential to thrive in 2022. As we eagerly await the expansion of Web 3.0, the continued maturation of the DeFi landscape ), the development of the non-fungible token (NFT) space, and the potentially game-changing opportunities arising from mastering blockchain interoperability, we recognize that considerable substance underlies some crypto valuations in terms of this they can offer in the future and what problems they can solve.

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