2022 Global Outlook

 

Agility counts in a year of disruption and divergence

 

Going into 2022, investors will want to prepare their portfolios for bouts of volatility and lingering inflation, likely by diversifying more broadly across asset classes, styles and regions. But they should also take this opportunity to factor in the disruptive structural trends that are driving – and even upending – our expectations of the future.

Economic growth seems likely to decelerate after the “base effect” rebound we saw in 2021. Covid-related uncertainty and supply bottlenecks will likely prove to be a drag on growth, as well as a continued source of price volatility. There should also be a divergence in growth figures and central bank support in various parts of the world, and the markets will likely react quickly to any positive or negative macroeconomic data. All the while, inflation seems likely to stay higher than many market-watchers expect.

 

 

 

2022 perspectives from our experts

 

Volatile markets may provide fertile ground for stockpickers – Virginie Maisonneuve, Global CIO Equity

 

From a macroeconomic perspective, there are at least three questions to consider as 2022 unfolds. As these questions are answered, the equity markets will likely be volatile, which can be fertile ground for stockpickers:

• What will be the evolution of real interest rates given the potential economic slowdown and the cyclical upward pressure on inflation?
• As China’s growth continues to decelerate, what support measures will the government put in place to cushion the slowdown? And how will the trade relationship of China and the US evolve in the context of “digital Darwinism”?
• How will countries work together on a range of big issues? The energy transition is critical: how will we calibrate the long-term transition to green energy and the shorter-term impact of the recent economic rebound on the oil supply and energy markets? In terms of the global pandemic, how will improved access to the Covid-19 vaccine limit the unpredictability of virus waves and lockdowns, and will this lift global economic growth beyond the “base effect”?

As equity investors, we will be particularly attuned in 2022 to the effort to combat climate change. There will be a growing number of initiatives from investors, asset managers, governments and communities, and all of them will need to be factored into investment decisions. This is where the integration of strong ESG data can make a big difference. Above all, it will be important for equity investors to be highly selective. At the same time, they must remain focused on their established investment processes and risk controls.

 

Amid low yields, look for proactive central banks and “green” bonds – Frank Dixmeir, Global CIO, Fixed Income

 

While the global economy is set to remain in expansionary territory in 2022, we recognise that the initial impressive economic growth rates achieved as economies reopened following the Covid lockdowns will not be sustained. Central bank and government action since the onset of the pandemic has significantly reduced some of the worst-case scenarios for the global economy, and dramatically diminished the prospects of a credit crunch. The path of inflation over the next 12 months will have to be watched closely, along with the way central banks react to these pressures.

Given that multiple factors indicate that interest rates will stay lower for even longer, rethinking portfolios to account for this outlook should be an urgent priority for investors. Risk management and diversification strategies must become far more agile. We are looking closely at selectively overweighting bonds from emerging-market countries where central banks have been proactive in addressing inflation risks – as long as valuations look attractive. In addition, global issuance of green, social and sustainability-linked (GSS) bonds recently hit a record high – evidence of fixed-income investors growing increasingly serious about tackling climate risks and social challenges.

 

Address low rates, high valuations and inflation with multi-asset strategies – Greg Hirt, Global CIO, Multi Assets

 

Growth and inflation data will likely remain much more volatile than in past cycles, making predictions increasingly hard to make. That is why we will pay particularly close attention to the potential for negative shocks, such as the risk of a new Covid-19 variant. But overall, we continue to hold a cautiously optimistic view for 2022.

Equities and other risk assets should be partially supported by the tail end of the post-Covid global recovery, and by cash-rich investors fighting off the effects of negative real (after-inflation) rates. Traditional fixed income may be somewhat challenged, as inflation risks stay elevated and major central banks reduce their government-bond purchases. As investors seek diversification against inflation risk, they may want to use a combination of commodities, liquid alternatives and inflation-linked bonds. Overall, the current environment of low to negative interest rates, high valuations and higher inflation might prove challenging for traditional asset classes. Multi-asset strategies that offer exposure to a broad set of asset classes – and have the flexibility to take long and short positions – may help investors address a wider range of risks.

 

2022 may offer a favourable backdrop for private markets: Emmanuel Deblanc, Head of Private Markets

 

Given the wide amount of uncertainty inherent in the macroeconomic outlook for 2022, institutional investors should consider the diversifying effect of private markets – which in the main have limited correlation to public markets. From private equity to private debt, from renewable infrastructure to development finance, private markets can cover a wide range of investment scenarios. And with the ability of some private-markets strategies to deploy over a multi-year time horizon, investors can aim to further enhance their overall diversification.

Investors may want to pay particular attention to these areas in 2022:

 

• Growing geopolitical tensions (particularly between the US and China) seem likely to help certain countries (such as Vietnam and India) benefit from a reorganisation of supply chains. Private-credit strategies focused on the Asia-Pacific region may be well-positioned in such an environment.
• The urgency of responding to climate change has triggered an acceleration of concrete opportunities in energy-transition transactions – particularly infrastructure investments accessed through the private markets. This marks a tremendous and swift paradigm shift.
• No matter your view on inflation, it can likely be accommodated through infrastructure investments. For investors with long-term horizons, infrastructure equity provides a robust solution. And for investors seeking to navigate potential interest-rate increases while yields are near historic lows, the high-yielding infrastructure credit space can offer attractive floating rates and even short durations.

 

Emphasise sustainability while looking “beyond climate” – Matt Christensen, Head of Sustainable and Impact Investing

 

As the year progresses, we will likely have answers to several critical questions around sustainability and its impact on the economy:

 

• Will COP-26 prove to be a defining moment for net zero, how will countries finance and fulfil their pledges, and how will their decisions affect economic growth?
• What could be the near and longer-term implications of the climate transition on inflation and the affordability of goods?
• What surprises can we expect from increased scrutiny of the modern economic value chain, and can reporting practices coalesce around clear standards?

 

The answers to these questions will add to the growing amount of data that investors need to embed into their decisions, and it’s not yet clear whether this will be helpful or a hindrance. Moreover, as sustainability becomes an increasingly essential factor in asset allocations, we may see more volatility and divergence in market performance – which will be yet another input for investors to process. This foots back to what will make 2022 an important year for impact investing. As investors push for positive societal outcomes related to climate and beyond, there will be a deluge of data on how those outcomes are scoped, measured and reported. Making this information actionable will be a challenge, but one that will ultimately facilitate positive change for the planet.

 

Download the full 2022 Global Outlook >

 

 

Disclaimer

_{Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Equities have tended to be volatile, and do not offer a fixed rate of return. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bond prices will normally decline as interest rates rise. The impact may be greater with longer-duration bonds. Credit risk reflects the issuer’s ability to make timely payments of interest or principal—the lower the rating, the higher the risk of default. Emerging markets may be more volatile, less liquid, less transparent, and subject to less oversight, and values may fluctuate with currency exchange rates. Investments in alternative assets presents the opportunity for significant losses including losses which exceed the initial amount invested. Some investments in alternative assets have experienced periods of extreme volatility and in general, are not suitable for all investors. Environmental, Social and Governance (ESG) strategies consider factors beyond traditional financial information to select securities or eliminate exposure which could result in relative investment performance deviating from other strategies or broad market benchmarks. Past performance is not indicative of future performance.}

_{This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.}

_{The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.}

_{This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP (Australian Registered Body Number 160 464 200) is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.}

_{This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan]; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.}

_1916457