EQUITIES remain a favoured asset class among global fund managers for 2022 in anticipation of higher inflation, low real yields and relatively stronger growth.
Fixed-income investments, on the other hand, are viewed cautiously by most amid a challenging backdrop.
In its 2022 global asset allocation view, RHB Investment Bank says the group maintains its “overweight” stance on equities, “market weight” on fixed income, and “underweight” on cash.
In global equities, the investment bank maintains the United States as its top investment destination; it expects emerging markets to continue to underperform the US in the year ahead.
“In the US market, we continue to favour large-cap growth over value. In Asia, our top investment idea is reducing exposure to China on any rally and use these funds to allocate to Indian equities,” RHB Investment Bank notes in its report.
The macro backdrop is positive on equities, according to BlackRock Investment Institute.
In its 2022 Global Outlook report, the global fund manager says it sees 2022 as heralding a new regime by delivering global stock gains and bond losses for a second year.
“We see another year of positive equity returns coupled with a down year for bonds. The powerful restart of economic activity will be delayed, but not derailed due to new virus strains, in our view,” BlackRock says.
“Central banks will start to raise rates but remain more tolerant of inflation. We see inflation settling above pre-Covid trends – we’re going to be living with inflation,” it adds.
BlackRock points out that while it favours equities over fixed income, it has dialled back its risk taking, given the wide range of potential outcomes in 2022.
“We prefer equities in the inflationary backdrop of the strong restart (of economic activity after a Covid-19-induced lockdown). We favour developed market (DM) stocks over emerging markets (EMs) as we dial down risk slightly amid rising risks to our base case,” it says.
“We are ‘underweight’ on DM government bonds – we see yields gradually heading higher but staying historically low. We prefer inflation-linked bonds, partly as portfolio diversifiers,” it adds.
Similarly for Credit Suisse, equities are favoured over fixed income.
“We foresee attractive returns from global equities in 2022, with earnings remaining the key driver. We expect equity segments that lagged the global recovery from the pandemic shock to emerge as bright spots alongside industries that benefit from secular growth trends,” the international fund manager says in its Investment Outlook 2022 report.
On fixed income, Credit Suisse says government bond yields will likely deliver negative returns in 2022.
“In credit, low spreads – both in investment grade and high yield – will barely compensate for the risks that come with higher yields. In general, we prefer to avoid duration risk,” it points out.
“We favour eurozone inflation-linked bonds and prefer senior loans due to their floating rate characteristics,” it adds.
Overall, Credit Suisse sees 2022 as a year of recovery and transition from the pandemic. Growth, it says, looks set to stay quite robust and labour markets should tighten.
“A slight increase in real interest rates and ongoing – although less severe – supply chain problems are risks that could lead to financial market volatility and need to be carefully monitored by policymakers and investors alike,” it says.
Although equity markets should be positive in 2022, returns will be more muted.
In addition, Schroders Investment Management says risks are rising as central banks begin to withdraw liquidity.
“We are now entering a more mature phase of the economic cycle when growth momentum peaks and central banks begin to withdraw support.
“Against this backdrop, we expect equity returns to be more muted but still positive, supported by solid corporate earnings,” Schroders chief investment officer and global head of multi-asset investment Johanna Kyrklund says in the group’s Outlook 2022 report.
In equity strategy, Kyrklund says it is important to identify companies with pricing power, given the risk to profit margins that higher input costs and wages pose.
She points out that these companies will be the ones better placed to weather the inflationary storm. “However, we do not believe that inflation poses a systemic risk for markets yet, as the willingness of central banks to start raising rates in response to inflationary pressures should keep inflation expectations in check,” she adds.