Yields down for 2022

“2022 will be characterized more by a slowdown than by a turnaround,” said Luca Paolini, for whom several factors should limit the expected returns in 2022, both for equities and bonds. “Between record valuations, tighter monetary and fiscal policies and rising inflation, tensions will remain and stocks are likely to see single-digit growth. Bonds, for their part, are visibly in a sustainable downtrend, even though a large rise in yields seems unlikely.

Return to pre-pandemic growth

At the macroeconomic level, Pictet’s economic activity is expected to return to pre-pandemic trends. “Growth should be synchronized and sectoral and geographic divergences could decrease. The global economy needs time to change direction. The consumption of services should be closer to the consumption of goods. In the meantime, the relaxation of travel restrictions should increase production and alleviate supply difficulties “.

In the debate between proponents of overheating and proponents of stagflation, Pictet joins the camp of the former by warning that, in its view, global growth is exposed to three specific risks. The first concerns demand, which could be affected by the rise in inflation and a barrel of oil above $ 100. An epidemic rebound and regulatory tightening in China would also have adverse effects.

As far as monetary policies are concerned, Pictet is betting more on a gradual tightening than on a complete turnaround. “The aggregate balance sheets of major central banks are expected to rise by about $ 1 trillion next year, less than the expansion of economic activity. In other words, excess liquidity will reduce for the first time since the global financial crisis of 2008. Despite this movement, real interest rates will remain low ”.

Relative opportunities for stocks

For equities, any beginning of the US monetary tightening cycle is synonymous with a below-average return, even if performance remains generally positive, and a temporary increase in volatility. While valuations driven by a decade of quantitative easing, cheap money and growing demand for financial assets from an aging population remain high, Luca Paolini sees opportunities in sectors that don’t appeal to just a few investors (energy, mining, Chinese real estate or even Turkish and Brazilian stocks).

“But equities also offer their share of relative opportunities,” he continues, pointing out cyclical sectors and equity markets, which are expected to outperform in 2022, driven by economic recovery and rising yields. “This is especially true of the Japanese market, financials, real estate and US small caps. Chinese tech stocks, on the other hand, have clear underperformance to compensate if regulatory restrictions ease. “

On the European continent, Pictet appreciates the UK’s value bias, its very low valuations and the weakening of its currency. Italy and Spain are also interesting.

“The situation is more nuanced in the United States. Stocks may seem very expensive, but earnings are expected to save returns in 2022 and prices could rise as profit margins rise. Analysts, however, appear to be overly optimistic about medium-term earnings prospects given looming tax, interest and wage hikes. ”

For shares and, more generally, all the assets of emerging countries, Luca Paolini is temperate and does not expect a return before the second half of the year.

Difficult year for bonds

“While our overall outlook is cautious but upbeat, for equities, bond investors should prepare for another tough year.” And “struggle to generate returns”.

Among the avenues to take, he favors Japanese inflation-linked bonds – “indeed, real rates are higher in Japan than in the United States and the United Kingdom, while the weakening of the yen raises import costs and raises inflation ”- leveraged US loans, short-dated corporate bonds, especially in emerging markets.

On the money market, Pictet expects the dollar to strengthen and the pound to weaken. “Other currencies, such as the euro and the Swiss franc, are expected to remain stable against the greenback.”

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