2022 Outlook

We are positive on Europe, Japanese and Asia ex-Japan equities as they have greater catch-up potential. Formerly recovery laggards, these equities have better prospects of staging stronger returns as global economic reopening gains momentum.

European equities are due for a catch-up after having traded at a discount relative to their US peers. Although the Eurozone had initially trailed behind in the economic recovery, positive inflation and credit growth indicate that economic growth is picking up pace. However, investors should keep an eye on risks to Europe’s growth outlook which include supply chain disruptions and a premature tightening of fiscal and monetary policy.

With undemanding valuations, Japanese equities have room to rise as fundamentals improve. The benefits of fiscal stimulus will be felt by the economy in 2022. Progress on vaccinations and strong corporate earnings growth will underpin sentiment.

While valuations for Asia ex-Japan equities have been trending slightly above historical levels, they have become cheaper following China’s regulatory tightening. Rising vaccination rates across the region will speed up reopening and boost growth. Supply chain bottlenecks should ease as more economies reopen.

The US economy emerged strongly from the pandemic-induced recession and led the world’s reopening efforts. But the high pace of growth is running out of steam while the recovery in other regions gathers speed. We are thus neutral on US equities - although corporate earnings should remain robust, high equity valuations will cap further gains. Investors should be more selective in exposure and seek sectors that will benefit from global, rather than domestic, reopening.

The slow pace of vaccinations in emerging markets ex-Asia will put a drag on economic recovery. High energy prices could support energy exporters such as Russia and Latin America, but the growing spotlight on sustainability will be an unwelcome development for them.

Most G10 central banks, except for the European Central Bank and the Bank of Japan, are expected to embark on monetary policy tightening in 2022 amid a recovering global economy and elevated inflationary pressures. The rising interest-rate backdrop will lead to higher government bond yields. The challenging macroeconomic landscape and the tightening central-bank stance mean investors need to be more selective within the fixed income market.

We are negative on high-yield bonds because they have become expensive and came with a higher risk premium. US and European high-yield bonds are pricey and the uncertain outlook on China’s property sector has raised credit risks in the Asian high-yield bond market. This will keep both yields and spreads high. We believe opportunistic investors may be better served by considering equity investments.

Elsewhere, the uneven recovery in emerging markets (EM) will weigh on EM debt. Certain regions such as Asia have been able to reopen and recover faster, but others such as Latin America and Africa are still struggling to drive growth. The strengthening USD is also a headwind for local-currency EM debt. Given the unappealing outlook for EM debt, investors should consider other debt alternatives such as Investment Grade (IG) corporate bonds.

High-quality corporate bonds, such as those from the Financial and Industrial sectors, are a safer addition to portfolios. They are more defensive because their wider spreads can absorb rising yields. With the economic recovery, these issuers are also likely to be in a stronger cashflow position which lowers default risk.

Amongst the high-quality issuers, we also like Asian IG bonds as their wider spreads can cushion against rising yields. Issuance of green bonds is set to grow in 2022 and we believe investors can tap into the growing demand as sustainability-linked bonds are set to become one of the fastest-growing fixed income segments.

Within commodities, we are neutral on gold and crude oil. The Fed’s tapering strategy is a negative development for gold prices. Higher yields and a stronger USD will dim the lustre of gold as a hedge against inflation. Strong demand for energy and the OPEC’s restraint on supply could worsen the global energy shortage, but crude oil demand may be reduced if the Omicron variant slows the global recovery.

The Fed’s normalisation policy and expectations of US rate hikes in 2022 will drive further gains in the USD. This will come at the expense of Asian currencies which are broadly expected to weaken relatively. Other major currencies such as the CAD and NZD could outperform the USD as their central banks are expected to dial back pandemic-era monetary stimulus and raise rates.

Useful information that you may like to know:

• Asset Class Review 2021