2022 Market Outlook by Dan Boardman-Weston
2021 has been better for many of us than 2020. The world had returned to some semblance of normality, markets have been stronger, and we can hopefully spend Christmas with our loved ones. I always have the unenviable task of trying to predict what may or may not occur next year. Speculating about what way the world may turn next year is, as ever, exceedingly difficult and we try not to place too much emphasis on the ebbs and flows of the short-term news cycle. The world always tends to look uncertain when taking a short-term view and it certainly feels that way with the recent Omicron news. However, I feel far more confident to make predictions of how the markets and the world will evolve over the coming years rather than the coming months.
Bonds
Firstly, let’s start with Fixed Interest. The nominal yields on most bonds are poor and the real yields are eye-wateringly poor. Bonds, especially government, can provide good short-term protection in the face of an increasingly uncertain world. However, if I stretch that holding period to the medium to long term then I cannot see any way to make money over the next 5 to 10 years. Gilts currently yield 0.70%, poor but three and a half times better than the start of 2021. If I look over the next ten years, then I think it’s a reasonable assumption that inflation will be higher than 0.70% given that it’s currently at 4.2% and has been less than 1% for a very limited time during the existence of humanity. If I take a long-term approach (which I do) then why would I allocate capital towards this area of the market. Yes, it may help if Omicron gets worse or Russia invades Ukraine, but will it deliver me a return above inflation over the coming decade? No. Next year could be great for bonds or it could be bad but I’m not comfortable to allocate meaningful amounts of capital to something that’s going to lose money in the long run.
Equities
If we turn next to equities, then things get quite interesting. We’ve had an astonishingly good rally in equities since the depths of the pandemic in March 2020 with a combination of loose monetary policy, generous fiscal policy, and earnings recovery driving equities higher. During 2022 we’re likely to see monetary policy become tighter to tackle higher levels of inflation and this may act as a headwind to higher growth parts of the market such as technology. However, this should benefit more value orientated sectors such as banks and so we could see a reversal of fortunes in 2022 compared to the top performers during 2021. As the UK stock market tends to be more value biased this could finally mean we see relative outperformance of UK equities compared to the American market, something which has not occurred since 2016 when Sterling depreciated significantly post Brexit.
Fiscal policy is likely to remain supportive across the globe and earnings growth likely to remain adequate barring any significant disruption from Omicron. Volatility is likely to ensue due to tighter monetary policy but generally the atmosphere for equities remains conducive. It’s pleasing to see that some of the speculative excesses that have been building up during 2021 have started to abate with many of the more esoteric meme stocks, cryptocurrencies and technology companies trading significantly below their highs.
At the other end of the spectrum we still have the big US tech companies hitting record highs on almost a daily basis. As we head into 2022, I think we will continue to see good earnings growth from these companies due to their monopolistic positions. When this is combined with active and passive flows being funnelled towards these companies and not eye-wateringly expensive valuations then the scene could be set for a relatively good 2022. I will revert back to my previous comments that predicting the short term is almost impossible and this isn’t what drives our thinking. We’re focussed on the long term and that’s the best prism to view the equity markets through. Looking at where we start at the end of 2021, we have interest rates that are incredibly low and likely to stay low, inflation that is rising and likely to stay higher than ‘normal’ and bonds that offer negative returns.
This leads me to TINA (There Is No Alternative). To be frank, TINA is one of the reasons we are invested in equities for our clients as there are fewer places that investors can invest to deliver returns that will help them meet their long-term goals. Equities offer this return potential and so I can say with no great confidence that I think 2022 should be OK for markets. I can say with far greater confidence that the next 10 years are likely to be really good for markets.
Other Asset Classes
One final brief thought on asset classes leads me to commercial property. Parts of the commercial property market (notably industrial and logistics assets) offer good levels of growth going forward. There is a huge supply/demand imbalance in the market which is driving capital and rental growth. I expect this will continue during 2022 and we remain confident over the long term as more and more commerce moves online. I’d much rather have Amazon as a Tenant giving me a 4% yield growing in line with inflation than lend the money to the government and garnering a 0.70% yield shrinking in line with inflation.
I’m sure that 2022 will throw us the odd curveball due to economic policy, geo-political tensions, or the dreaded C word. I remain confident about the future prospects of the equity market and look forward to reviewing this forecast in ten years’ time when we’re all a little older but when things in the world hopefully look a little healthier and we’re all hopefully a little wealthier.
We hope you and your family have a happy and healthy Christmas and look forward to seeing you in 2022.