State Street Global Advisors has predicted that equity market returns will fall to more normal levels in 2022 as fiscal and monetary policy is scaled back.
The firm said that global equity market returns had averaged 18.4 per cent p.a. in the past three years, more than triple the average 6.1 per cent p.a. seen over the past 25 years.
“As government and Central Bank pandemic policy settings begin to unwind, investors should readjust their expectations for less bullish returns and a few bouts of volatility,” said Bruce Apted, head of portfolio management - Australia active quantitative equities at State Street.
While technology and consumer discretionary have dominated returns in the past three years, over the longer term, State Street noted that no sector had remained positive consistently and periods of outperformance were often followed by periods of underperformance.
Mr Apted noted that investors had repriced long-term interest rates higher in light of the economic rebound and higher than expected inflation.
“As this has been occurring, the growth companies, especially the expensive growth companies, have tended to underperform,” he said.
“The relationship is partly due to the longer duration cashflows of these companies, partly due to rising rates reducing the speculative elements in the market and partly due to the improving prospects of many other companies.”
With “more normal” returns in store for 2022 and potentially beyond, Mr Apted said that investors should prepare.
“As the pandemic policy settings are unwound, we should expect equity market returns to return more in line with history – think single digits with bouts of volatility,” Mr Apted said.
“As economic activity normalises and inflation and interest rates rise, we continue to see investors rotation from expensive growth to value. The most expensive parts of the market are the most vulnerable to this change in the market environment.”
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.
