Future returns: Navigate moderate gains and new directions in 2022

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Investors are emerging from a transitional period and entering a new normal as the second anniversary of the Covid-19 pandemic approaches. Last year was better than the economic lows of mid-2020 in many ways, with S&P 500 earnings as well as US and global equity markets surpassing pre-pandemic levels this year. Comparisons to the 2020 collapse made the year even brighter in contrast.

But expect a 2022 characterized by more moderate growth. For investors, it is difficult to factor in all the moving parts of this economic moment, from high inflation and speculation about the behavior of central banks to uncertainties over Delta, Omicron or future waves of Covid-19.

Penta took a look at some 2022 forecasts from Citi Global Wealth and the wealth management arms of BNY Mellon, Deutsche Bank and UBS to identify strategies that can help investors maximize returns and manage risk during this transitional time.

UBS calls 2022 a year of ‘discovery’, where investors’ find out what ‘normal’ growth and inflation rates look like and how economic policy is reacting, after two years dominated by the effects of the pandemic.

With BNY Mellon forecasting a range of 1.25% to 2.25% on 10-year Treasury yields in 2022, high-yield, investment-grade corporate bonds remain relatively more attractive.

“Investors, however, should expect prices to appreciate less in the future, as much of the recovery in spreads has already occurred,” he said.

This fits with a major message from banks: Investors are going to have to look for gains more strategically, including alternative yields and asset classes, as well as a realignment of portfolios with a look to the future.

Here are some highlights of the forecast that investors should keep in mind as 2022 unfolds.

Inflation pensions

After hitting 6.8% in November, a 40-year high in the United States, inflation is the elephant of the economy in the room. But all four banks agree that inflation should become more bearable in 2022. BNY Mellon suggests that it will settle in a range of 3% to 3.5%.

UBS suggests this is due to multiple factors, including stabilizing energy prices, easing frictions in the labor market, and resolving imbalances between supply and demand.

“This should support equities, mitigating risks to corporate margins and reducing the likelihood that interest rates need to be raised quickly,” the bank said.

Deutsche Bank anticipates central bank policy changes in 2022, “with other central banks starting to follow the Fed’s tightening line.” Nonetheless, he expects central banks to remain “mostly accommodative”, due to uncertain future growth, and that there will likely be a Fed rate hike at the end of 2022 by the end of the month. reduction process. Any postponement, according to Deutsche Bank, could mean facing a more serious inflation problem in 2023.

Longer term, Citi says investors should expect “somewhat higher inflation” over the next decade compared to the previous one. This can decrease future returns on high yield and investment grade bonds as well as uninvested cash.

Look for unconventional returns

With bond yields, credit spreads and interest rates low by historical standards, investors will “be on a continual search for ‘unconventional’ yields,” says UBS.

Unconventional yield seekers may include U.S. senior loans, synthetic credits, private credits, and dividend-paying stocks in their portfolios.

Citi suggests that investors consider taking “less traveled paths” to develop their portfolios. These include ‘higher yielding alternative fixed income and private credit’, which can mitigate the impact of negative real interest rates on portfolios.

The strategy of seeking dividend yields in particular, according to Citi, is more important than ever. “For the highest quality companies, dividends of 2-3% that grow at a rate of 5% over the long term can potentially capture most of the return on stocks for the coming year with less risk. “

BNY Mellon assigns a ‘slight overweight’ to alternatives for 2022. “While returns from private equity and venture capital are not likely to continue the exceptional performance of the past 12-18 months, they should always offer higher returns. attractive than public procurement. ,” it says.

While Deutsche Bank also advocates investing in alternative areas like venture capital, it cautions against liquidity and risk issues, which investors should also consider when allocating these spaces.

Strategic portfolio allocations

Simple portfolios, like traditional 60/40 stocks / bonds allocations, face challenges in today’s environment. Deutsche Bank says the current environment may be “less stable” than it first appears due to artificially low or negative real interest rates, and the impact that even small rate changes may have. of interest may have on asset classes.

In response, banks are offering wider ranges of asset classes in portfolios. “This has included diversifying fixed income holdings, expanding the mix of stocks and adding alternative asset classes,” BNY Mellon said.

In describing its 2022 strategic asset allocation portfolio, Citi states that “it is remarkable how much our methodology recommends allocating to alternative and illiquid allocations.” For example, hedge funds, private equity and real estate make up about 25% of the allocation. It also encourages investors to be wary of holding too much cash.

“Many qualified investors have too little or no allocation in alternative and private asset classes, but way too much cash,” says Citi, recommending that the allocation hold much less cash, only 2% versus 33% in its naive base scenario.

Investors looking to reallocate their stock mix could follow UBS’s suggestions. “In the longer term, we see opportunities in disruptive technologies – artificial intelligence (AI), big data and cybersecurity – and in investments related to the net zero carbon transition. “


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