I hope everyone is enjoying the holiday season this year and doing their best to spend time with loved ones as best they can with the current gathering and travel restrictions.
With this being my last column of the year, I want to provide a short market outlook summary for the coming year.
To be honest, with the Omicron variant surge in very early days and no idea yet how big of an impact it will have on global economies yet, putting together a confident outlook is a pretty tough thing to do. But having said that, the markets have proved over many decades that they are resilient and whatever impact Omicron has will not be a permanent one.
So what lies ahead in 2022? The year ahead will likely offer a continuation of healthy economic growth, continued heightened market volatility and a higher interest rate environment proportionate to the prevailing higher inflation.
I wanted to summarize with three key themes:
1. We will likely transition from rapid reopening (and growth) to more normalization.
After a year of rapid recovery and growth fuelled by an excess of US$16 trillion of stimulus, economic growth is likely to moderate in 2022. But we shouldn’t confuse slower growth for low growth. Expectations are for 2022 to still be a strong year, just slower than the very high growth rates of 2021.
2. Market returns will also be much closer to average.
Much like economic growth mentioned above, stock market growth will also return to a more moderate growth level. Most investors experienced very high rates of return in 2021 but shouldn’t be surprised if next year’s returns are much more in the mid-single digit range.
3. The bond markets will be about the 2021 transitionary inflation story that never happened.
The massive amount of stimulus injected into global economies provided a safety net during Covid lockdowns but also left the residual impact of inflation. While much talked about in 2021, this inflation will prove much more persistent, putting the term “transitionary” to rest and setting the table for a higher interest rate environment. Central bankers will have to catch up and as a result we could see another challenging year for bond investors.
Overall, 2022 looks to be another good year for investors, though not without many bumps along the way and not without some risk. As always, there could be some as of yet unknown event around the corner and a market correction could happen. However, properly diversifying your portfolio and active management will help control those risks.
At some point in the future, we will look back at what has transpired over the past couple of years and remark at how strong the economic recovery was and how strong the markets responded. I just hope that point in time is not too far away.
Wishing all of you a healthy and happy holiday season and look forward to reconnecting in the new year.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.