State Street Global Advisors has predicted above-potential global growth in the year ahead as part of its outlook for global markets in 2022.
However, the firm said that it expects the economic recovery would likely become “uneven and multi-layered” following a period of peak growth and policy accommodation.
High growth and inflation are set to extend into next year, but State Street expects inflation to begin to steadily decline from mid-2022.
“Much of the inflation we are experiencing at the moment is ‘baked into the system’ due to past fiscal stimulus and supply chain challenges,” said State Street Global Advisors chief portfolio strategist Gaurav Mallik.
“Central banks understand that aggressive rate hikes can be ineffective and can also hurt growth prospects. Therefore, we believe central banks will focus on regaining control of market and investor expectations to ensure a steady and gradual normalisation over the next two years.”
The firm noted that central banks in emerging markets were leading the charge towards higher interest rates, while central banks in developed markets are expected to follow suit in the coming year.
On the fixed income market, further flattening of the yield curve is expected by State Street Global Advisors with an increase in yields and the hawkish tone of the Federal Reserve set to potentially accelerate the economic cycle.
“We consider riskier fixed income spreads to be a good source of carry and incremental yield over US Treasuries in 2022," said State Street Global Advisors global chief investment officer Lori Heinel.
"Spreads within riskier fixed income sectors, including investment grade and high yield credit, are expected to remain well-supported by strong fundamentals and foreign investors’ demand for yield. A more upbeat ‘rising stars’ backdrop will help enable a benign default and downgrade environment as well.”
While cautioning investors about rising volatility in the equities market, the firm said that equities offer “attractive excess returns” in comparison to other asset classes due to a number of important factors.
These include the anticipated strong outlook for corporate earnings, the sustainable level of the average price-to-equity ratio for MSCI World and the equity risk premium remaining above the long-term average in developed and emerging markets.
“We expect markets to be less complacent in 2022 as monetary policy tightens and inflationary pressures continue,” said Ms Heinel.
“State Street Global Advisors sees an opportunity for active management over the coming years and believes that investors may benefit from a selective approach to the equities market.”
The firm said cyclical stocks such as industrial, materials and energy companies will benefit from a renewed government emphasis on hard infrastructure in the future.
Meanwhile, companies in emerging markets are not expected to fully benefit from the reopening trade until later next year due to lower vaccination rates.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
