Financial markets have endured a bumpy ride in the first month of 2022, however the overriding message from Wall Street and beyond is that conditions still look good in the forthcoming year. Inflation, monetary policy missteps, and sustainability are all key themes that are expected to unfold over the coming months, and we have provided some context to these themes below for investors to consider as they approach asset allocation decision making in 2022.
Key Theme 1: Covid-19 to Linger
Concern regarding the Omicron variant has rolled over in developed nations in recent weeks, with high vaccination rates, broad immunity, and low hospitalisation rates supporting the economic growth outlook for 2022. Despite this, with Beijing still pursuing a zero-Covid policy and medical agencies warning that we could see renewed spikes in variants of Covid-19, Omicron has acted as a reminder of the speed at which the pandemic landscape can change. That being said, the base case from analysts assumes that individuals will become increasingly immune as the year progresses, and it is anticipated that households and regions will learn to live with it as Covid-19 transitions from a pandemic to an endemic.
Key theme: Inflation Pressures Likely to Persist
Financial markets had already baked in expectations of high inflation rates that would continue to surpass central bank targets in 2022. Despite this, concerns that inflation may remain persistently higher for longer in developed nations has led to financial markets pricing in upside risks to inflationary pressures. Considering this, we expect markets to be increasingly reactive to demand-side and supply-side data flows as they emerge, which could result in choppy market conditions throughout much of H1. This theme has already caused firm valuations to come under scrutiny in the first few weeks of the year, where value-oriented firms and regions have fared better compared to their growth counterparts.
Key Theme: Policy Normalisation
Having been a key focus in Q4 2021, financial market attention will largely be focused on the reaction of central banks to inflation pressures in 2022. As of writing, traders are betting on four or more rate hikes from the Federal Reserve this year, with the first one expected in March. The Bank of England is also expected to conduct several rate hikes throughout the year, and analysts are attempting to anticipate how financial markets will react. Similar to above, value-oriented/cyclical stocks could perform favourably, while long duration and non-equity assets could face headwinds in the build-up to the first set of rate hikes in 2022.
Key Theme: Journey to Net Zero
Although sustainable-oriented assets have been caught up in the sell-off so far this year, the regulatory, environmental, and corporate tailwinds could accelerate over 2022 as policymakers and corporations accelerate the transition to net-zero. Whether the transition is smooth or disorderly is another question, albeit we remain optimistic on the journey to net-zero and the potential to add resilience to the OBI portfolios through this theme.
While this is not an exhaustive list, these four themes encompass those that analysts and financial markets have been focusing on as they position their asset allocation for 2022. Other themes, such as domestic and geopolitics, corporate earnings, and economic data flows are expected to be influential over the next eleven months. For example, we have already seen geopolitical tensions rise in the Russia-Ukraine situation in recent weeks, and domestic elections, such as the US mid-terms, could have important implications for legislation over the coming years. As such, it is our view that an active management approach will be required to mitigate any unexpected events that may arise as we progress through 2022, and the OBI portfolios are well positioned to mitigate unsystematic risks that may emerge over the coming year.
To discuss our actively managed portfolio options, don’t hesitate to get in touch with the team on 01604 621467.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.