Kristina Hooper’s top 10 predictions for 2022

01-10-2022
Kristina Hooper’s top 10 predictions for 2022

Covid omicron variant a major factor

 

Oh what a year it’s been! We began last year with high hopes, given the rapid development of vaccines – and those hopes were realized. Several powerful engines drove global stocks – especially developed market stocks — higher: monetary stimulus; fiscal stimulus; and the distribution of effective vaccines. In addition, global earnings growth was strong in 2021.

Inflation proved to be a significant issue in 2021. The re-opening of economies resulted in higher spending levels, driven by pent-up demand and elevated household savings. Continued waves of Covid-19 caused supply-chain disruptions, exacerbating inflationary problems. However, for the most part, markets seemed to look through this.

2021: Markets in a nutshell

Stocks. Global stocks posted double-digit gains for the year.1 U.S. stocks outperformed international stocks.2 Emerging market stocks posted relatively weak returns, dragged down by Chinese equities.3 The Hang Seng Index was the worst-performing major index as a series of regulatory actions intended to achieve China’s “common prosperity” vision caused a selloff in these stocks.4

Bonds. Core bonds underperformed non-core fixed income such as high yield and convertible bonds.5

Alternatives. Real estate investment trusts and commodities performed well.6 Within commodities, energy and industrial metals experienced strong gains while gold and silver fell.6

Top 10 predictions for 2022

Here are 10 developments I expect to see in the year ahead:

1. The omicron variant. This will be a negative force in the short run, exacerbating supply-chain disruptions and aggravating inflation. Within a few months, however, omicron is likely to be a positive force if it remains as mild as we have seen thus far. Because it is highly contagious, it appears to be crowding out the more dangerous delta variant. While I am certainly no epidemiologist, it seems likely to rapidly move through countries, serving as a de facto immunizer (far faster than any vaccination program), which could mean the end of the pandemic by the end of the first half of 2022.

2. Emerging markets. I expect emerging markets (EM) stocks to have a very bumpy start to 2022, given the spread of the omicron variant. However, I believe that for the full year, emerging markets equities are likely to outperform developed market equities, including U.S. equities. I expect emerging markets growth to accelerate while U.S. and European economic growth decelerates to more normal levels. Unlike 2021, Chinese equities are likely to help drive EM equities higher in 2022, helped by a re-acceleration of China’s economic growth, thanks to monetary and fiscal stimulus.

3. Geopolitical crisis. I expect at least one significant geopolitical crisis in 2022 (Russia invading Ukraine is at the top of the list of possibilities), but believe that markets will shrug it off within days after it occurs. In recent years, only trade woes have had a lengthier impact on markets, and even then it has been relatively short-term in nature.

4. Stock market correction. There is likely to be a U.S. stock market correction in the first half of 2022, but I expect a relatively swift recovery. It’s been so long since we have had a sizeable correction that the odds of one have grown – and increasing the odds is the fact that the U.S. Federal Reserve (Fed) is starting to normalize monetary policy in the first half of 2022 and may start to hike rates.

5. Volatility. Global stock and bond market volatility should increase as the Fed begins to normalize monetary policy. But I believe the Fed has the potential to positively surprise with less tightening than markets currently expect.

6. Rate hike. I do not believe that the Fed will hike rates in March. It’s just too soon, especially given the spread of the omicron variant. However, the Fed seems eager to start reducing its balance sheet.

7. Cylcial stocks. I expect cyclical stocks to outperform defensive and secular growth stocks in the U.S. early in 2022 in anticipation of a post-omicron recovery, but that for the full year, growth will outperform.

8. Inflation. U.S. inflation is likely to rise further, especially given the spread of the omicron variant and its potential impact on supply chains and labour, but it should peak by mid-2022 and then slowly decelerate.

9. Treasury yield. The 10-year U.S. Treasury yield will end 2022 higher than it is now, in my view, as the Fed begins to normalize monetary policy.

10. ESG investing. Finally, I expect to see even more interest in environmental, social, and governance (ESG) investing in 2022, driven in part by a dramatic acceleration in electric vehicle adoption in the U.S., Europe, and China.

Read more from Invesco’s 2022 Investment Outlook

Kristina Hooper is Global Market Strategist at Invesco.

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Notes

1. Source: MSCI. The MSCI All Country World Index rose 17.04% (in USD terms) in 2021. The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets.

2. Sources: S&P, MSCI. Based on the S&P 500 Index versus the MSCI All-Country World ex-U.S. Index. The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market. The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the U.S.

3. Source: MSCI. The MSCI Emerging Markets Index returned -5.68%, while the MSCI Emerging Markets Index ex-China returned 7.01%. The MSCI Emerging Markets Index captures large- and mid-cap representation across 26 emerging markets (EM) countries.

4. The Hang Seng Index is an unmanaged index considered representative of the Hong Kong stock market and includes the largest companies traded on the Hong Kong Exchange.

5. Core bonds represented by the Bloomberg Global Aggregate Corporate Index, a flagship measure of global investment grade, fixed-rate corporate debt. Convertible bonds represented by the Bloomberg Global Convertibles Index, which blends the three regional Bloomberg Convertibles Indices from the U.S., EMEA, and APAC into a single global benchmark for the convertibles asset class. High yield bonds represented by the Bloomberg U.S. Corporate High Yield Index and the Bloomberg European Corporate High Yield Index, which are unmanaged indexes representative of the high yield corporate bond markets in the U.S. and Europe, respectively.

6. Source: S&P. Based on the S&P Global REIT Index, a comprehensive benchmark of publicly traded equity REITs listed in both developed and emerging markets, and the S&P GSCI Index, an unmanaged world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets.

A cyclical stock is an equity security whose price is affected by ups and downs in the overall economy.

Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Businesses in the energy sector may be adversely affected by foreign, federal or state regulations governing energy production, distribution and sale as well as supply-and-demand for energy resources. Short-term volatility in energy prices may cause share price fluctuations.

Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.

The use of environmental, social and governance (ESG) factors to exclude certain investments for non-financial reasons may limit market opportunities available to funds not using these criteria. Further, information used to evaluate ESG factors may not be readily available, complete or accurate, which could negatively impact the ability to apply ESG standards.

Dollar-cost averaging is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high.

Disclaimer

© 2022 by Invesco Canada Ltd. Reprinted with permission.

The opinions referenced above are those of the author as of Jan. 3, 2022. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.

Diversification does not guarantee a profit or eliminate the risk of loss.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors and the amount of any dividend may vary over time.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.