2022 Outlook – Global Equities

Global equity markets will enter 2022 trying to determine the strength and persistence of economic activity in the face of rising inflation, central bank policy decisions and the impact of multiple COVID-19 variants.

We have a cautiously optimistic economic and capital market outlook for the upcoming year. Our base case assumption is:

• Economic activity will slow from its recent pace yet remain above trend.
• Inflationary pressures will continue to persist but moderate throughout the year.
• Central banks around the globe will wrestle with stronger growth, inflation and the risks to economic activity from the ongoing impact of COVID-19.

The U.S. Federal Reserve (“the Fed”) has already communicated its intent to begin tapering and suggested interest rate hikes might be forthcoming in early 2022. The Bank of England recently raised rates and it’s expected other central banks will follow suite as economic activity continues to rebound. China is in a slightly different phase as its economy moderates from historically elevated levels. Investors will closely monitor progress in China and the ongoing U.S.-China policy battles. 

While most investors are expecting higher interest rates globally, equity markets will be concerned with the magnitude and pace of rate hikes. Stronger economic activity and mildly expanding inflation are typically beneficial to equity markets. More dramatic increases in inflation or rate expectations, however, will challenge assumptions about appropriate equity multiples, which have benefitted from the steady decline in interest rates. How much will rates rise? Will higher rates stall economic expansion? What is the appropriate multiple for equities? These will be key questions throughout the year. 

Economic expansion

Of course, the pace of expansion will vary from region to region and industry to industry. In a bit of a departure from recent history, growth in the U.S. looks to lag other regions, as seen in the chart below.

Source: Goldman Sachs

Yet, despite somewhat slower economic growth, earnings in the U.S. are likely to grow more than in the above noted countries as valuations are much higher. The relative price to earnings ratio for the U.S. is among the highest in the world. Much of this can be attributed to the composition of U.S. benchmarks being heavily skewed toward technology and growth stocks, which have been prime beneficiaries of lower interest rates and unsteady economic development.

Positioning and opportunities

From a portfolio positioning perspective, we have been diversifying by increasing our allocations to regions and sectors that have greater economic sensitivity, and balancing our growth and value exposures to a more neutral position. If we are correct in our assumption that global economies continue to open and expand, economically sensitive sectors should outperform more defensive sectors. 

Looking at correlations of various investment styles to rising interest rates and/or inflation suggests value strategies would outperform growth in a higher inflationary environment.

Relative to other countries, U.S. equities are more heavily weighted toward growth stocks. Canada, Europe and emerging markets tend to have greater exposure to value. If inflation turns out to be more persistent rather than transient, greater geographical diversification may be warranted.

A key consideration for 2022 is balance. A balance between countries, sectors and styles should provide a smoother path toward investment returns in what could be a volatile year. We enter 2022 with a preference for cyclical sectors, such as industrials and materials, and remain overweight in North America and Europe versus Asia-Pacific. 

In summary, we are positioned for continued economic and earnings growth with a preference for companies with more reasonable valuations. We have struck a balanced approach across regions, sectors and investment styles given the likelihood of continued inflationary pressures and the prospect for higher interest rates.

IMPORTANT DISCLAIMERS

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.

The opinions expressed in the communication are solely those of the author(s) and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.

CI Global Asset Management is a registered business name of CI Investments Inc.

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Published January 10, 2022