The Year Ahead
The Infinity Team anticipate a tougher year for equity markets in 2022. Strength in global labour markets and GDP, combined with ongoing supply chain issues, suggests that inflationary pressures could persist.
Monetary Policy in 2022
One important factor impacting bond and equity markets is the cost of money and real rates of return. Investors have started to reprice risk based on increasingly hawkish commentary from the Federal Reserve, anticipating interest rate rises and quantitative tightening measures.
Jerome Powell in his most recent address suggested that current conditions mattered for the ‘pace of policy adjustments’, implying interest rates may need to increase sooner and faster than expected. This is in line with our 2022 forecast for interest rates, where we expect a ‘flattening of the curve’ meaning short term rates rise faster than long term rates.
In our view, the Fed needs to proceed with caution. Economic conditions have continued to strengthen, particularly in the US where we have seen GDP growth of 6.9% annualised in the last quarter of 2021, the strongest quarter since 1984, and unemployment as low at 3.9%. The last thing the Fed wants is to increase rates at a pace that cuts the legs off the recovery.
Cost Pressures To Continue
Infinity anticipate weaker earnings for corporates on the back of increased cost pressures and uncertainty around shipping and inventory levels. Given these conditions corporate bond spreads could widen and equity earnings growth to slow.
We are positioning a low duration exposure in our fixed interest allocation, ideally allocated to floating or inflation-linked bonds. Infinity holds a preference to quality equities over value equities, with a focus on companies with strong cash flow generation and the ability to pass on price increases.
Sustainable Growth over Speculative Growth
While we still like growth equities we expect them to come under pressure given expectations of a rise in rates. We like to own companies that can grow their earnings and have shown they are profitable. We believe speculative growth equities with no real pathway to profitability will underperform.
Emerging markets look cheap on certain valuation metrics; however, we remain cautious given the increased risks faced and uncertainty surrounding sudden policy changes.
There are many other uncertainties financial markets face this year, including:
We will navigate these uncertainties as always through diversified asset allocation and active portfolio management, looking to mitigate risks and capture opportunities as they present themselves.
Ben Casley is an Investment Analyst at Viridian Advisory.
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