Policy and markets are likely to become increasingly ‘normalized’ in 2022 with major central banks turning less accommodative and equities and corporate bonds projected to deliver positive, but increasingly modest and volatile returns.
This was stated by executives at Standard Chartered Bank in the 2022 Economic Outlook – A Winding Road to Normality.
Following existing recoveries from the pandemic that ravaged economies of the world with dips in investment and growth the aftermath, “Any path to normality, though, is likely to follow the twists and turns of the inflation debate, virus mutations, and policy shifts.” Chief Investment Officer, Steve Brice stated.
Cyclical sector picks were primarily allocated around longer-term themes to benefit investors– – The Winds of Climate Change, Embracing a Digital Future and China’s ‘Common Prosperity’. This he advised investors to take advantage of in order to better position themselves for the opportunities that will present themselves in the new financial year.
In projecting portfolio yields, a preference for equities over bonds was noted. “We expect equities to outperform bonds and cash, even if returns are muted relative to recent years. We prefer US and Euro area equities, in particular. Minimizing interest rate and FX sensitivity is key to selecting bonds. We prefer Asia USD and US/European High Yield corporate bonds”
Against the backdrop of ongoing containment of the Omicron variant of the Covid-19 pandemic, Brice noted that Omicron will not be a defining feature. However, he listed plans to up the monitoring of emerging Market equity outlook “as vaccine coverage broadens and the USD peaks”
“We prefer Asia USD (including High Yield) and US/European High Yield corporate bonds. Income strategies should benefit from tilts to covered calls, subordinated bonds and floating-rate loans”
Read also: CBN, World Bank give GDP growth projection for 2022
In 2022, the US and Europe were projected to lead global growth which is to stay well-supported, above its long-term trend, while China is likely to “manage a soft landing.”
Across the economies of the world especially the United States and Europe, the first Half-year economic growth was projected to be stronger than the second half of the year.
The bank has also stated its preference for sector strategies in the new year. “In the US, we prefer the technology sector. Rising bond yields could still pose a headwind for technology, but we believe the positive earnings growth outlook is likely to more than offset this”
In China, preference was accorded to discretionary and industrials while technology, consumer discretionary, industrials and financial sectors were preferred in Europe.
Following from the COP26 (United Nations Conference of Parties) climate conference and the tight deadlines on carbon emissions together with the evolutions of global climate regulations, executives at Standard Chartered also foresee a “seismic shift in consumption, investment and regulations of governments, companies and individuals adapt existing infrastructure, technology and behaviour to drive the transition to ‘net zero’ as the world transits to ‘net-zero’ carbon emissions.
According to Cross-Asset strategists Audrey Goy, “We expect capital flows to accelerate into ’net zero’-related investments over the coming decade as economies transition to a low carbon environment. We believe investors should consider exposure to firms and sectors enabling this transition, including electric vehicles, water, infrastructure and green CAPEX.”
With current spending on infrastructure for development and to achieve net-zero commitment insufficient, the bank projects significant growth over the next few years. “Companies linked directly to infrastructure development (to achieve net-zero and clean water – another policy goal) will likely benefit from this long-term tailwind. In addition, companies that are building blocks to achieve global green ambitions (such as copper, aluminium and semiconductors), which are key inputs to many technologies relating to net zero, also present interesting opportunities, in our view. Many of these building blocks have a long lead time from development to output and could be a key focus for investments.” They expounded.
In terms of technology, Marco Lachini, expects three trends to propel digital transformation: the increase in connectivity, the exponential rise in data creation and the increased penetration of automation.
“With the number of connected devices globally set to exceed 11bn, Internet of Things (IoT) is likely to remain one of the key focus areas for businesses. However, to fully amplify the transformational impact of IoT, it needs to be combined with key technologies such as 5G connectivity, cloud computing, data analytics, machine learning and cyber security.”
They thus advised investors to consider exposure to enabling digital infrastructures like the 5G/Internet of Things (IoT), Cybersecurity, Financial Technology (Fintech) and Blockchain Solutions.