While predicting equities should provide a positive return in 2022, Aegon Asset Management has identified four themes which could pose challenges to performance in the year ahead.
In an environment of an improving economic backdrop and as the world moves back to normality through 2022, Stephen Jones, global chief investment officer, multi asset solutions and equities at Aegon, said equities should provide a positive return.
However, he added the decisions taken by central bank decisions, inflation, the possibility of slowing economic growth and geopolitical risks, could all combine to threaten equity markets over the next 12 months.
“Tighter monetary policy in response to high levels of inflation in many countries is likely to remain a major theme for financial markets over this year,” Jones said. “Key for investors will be how aggressively the US Federal Reserve tightens policy over the course of 2022.”
Post the most recent Federal Reserve meeting, Jones noted there is reasonable probability of seven rate hikes this year as well as quantitative tightening, although he added this remains fluid.
Inflation and slowing economic growth
Turning to inflation, while many central banks around the world are increasing interest rates to curb rising inflation, Jones argued the surprise to the market could be that it recedes quicker than expected.
“The bulk of global inflation surprises has been driven by core durable goods pressure, as accelerating good prices reflect supply chain disruptions,” he said. “The expectation is for inflation to remain high for the next few months and then decline into year end.”
For Jones, the risk to inflation remains if supply disruptions do not abate and high prices become embedded in inflation expectations.
“However, inflation remains an uncertainty – many of the pressures that allowed inflation to rise sharply could ease in the coming quarters, particularly as consumers move from goods to services,” he said. “This will have a significant bearing on the extent to which central banks tighten monetary policy this year.”
As economies recover from the covid pandemic, Jones said that global economic growth should continue. However, he added the pace of this expansion will likely moderate.
“Production should be supported by employees returning to the workforce and this should help ease supply chain bottlenecks,” Jones said. “However, governments played a major role in supporting demand over the last couple of years and the removal of this support will likely cause the pace of economic growth to ease.”
Political tension
Finally, turning to events outside the control of markets, Jones said while Russia/Ukraine will likely be a slow burn and not a full-blown conflict, he added the risks are on the rise.
“If this risk abates this will remove an uncertainty for the markets, which would ease investors’ concerns,” he said. “Our base case remains on no significant escalation in Eastern Ukraine in the near term but expect tensions to continue as troops and equipment continue to be moved.
“Ultimately the cost might be too high and the reward too doubtful for Russia to launch a full-blown invasion.”
