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MARKETS AND ECONOMY
2022 Investment Outlook
The stage is set for 2022 to be a year of transition. Our outlook is centered on the question of inflation and how markets and policymakers may react to it.
Executive summary
Following dramatic fiscal and monetary policy moves in 2020 and 2021, the stage is set for 2022 to be a year of transition as policies and economies move toward a more normal state. However, issues remain that will likely define the economic and market environment, including continued supply-chain disruptions and an upsurge in demand that threaten to keep inflation high across many economies. For 2022, our outlook is centered on the question of inflation and how markets and policymakers may react to it.
Inflation: The critical question for investors
Inflation: The critical question for investors
Inflation: The critical question for investors
Chief Global Market Strategist Kristina Hooper presents our base case: A transition to more normal growth and a peaking of inflation in 2022. She also addresses two additional scenarios: What if inflation fears are overblown, and what if inflation is more persistent than expected?
(00:05): Welcome to Invesco's 2022 Investment Outlook. We've once again brought together experts from across our firm in Europe, North America and the Asia Pacific region to share their thoughts about the position and direction of markets and the global economy as we begin the new year.
(00:24): After a tumultuous year dominated by the global COVID pandemic, we anticipate that 2022 will be a year of transition during which we'll see global economies and fiscal and monetary policies return to a more normal state. However, inflation is likely to remain an issue, at least in the shorter term, as a result of continuing supply chain disruptions as well as increased demand.
(00:51): As the outlook explains in detail, our base case calls for global growth to revert to a more historical trend pattern as countries around the world continue to emerge from the pandemic. We expect inflation to peak in mid-2022 and then moderate toward target rates over the remainder of the year and into 2023.
(01:11): We believe that the Federal Reserve will generally continue its accommodative policies. Although, we anticipate a rate hike in the back half of 2022 and other developed countries' central banks may move to raise rates more quickly. We also expect to experience a good bit of volatility as markets move through this transition period.
(01:29): As always, we've supplemented our base case with two tail risk scenarios to explore alternative possibilities. Our upside scenario posits a situation in which inflation turns out to be both milder and more transitory, returning from its current highs to a more normal level. In this case, we would expect to find stronger growth globally with global economies positioned earlier in the cycle than might otherwise have been expected.
(1:58): In the downside scenario, inflation proves to be a greater danger than anticipated by our base case with central banks losing the reigns and rates continuing to push higher, potentially above 4% through 2022 and into 2023. This could be caused by a combination of increased demand driven by monetary expansion as a result of the pandemic and continuing supply side disruptions. The accompanying loss of confidence in central banks could also set in motion a chain of events that brings an end to the current economic cycle.
(02:30): I hope you'll take the time to explore our 2022 Investment Outlook fully, including the detailed asset allocation guidelines provided by our experts.
(02:40): We hope you've found this overview of our 2022 Investment Outlook to be both interesting and actionable. And we invite you to review the full outlook for a more detailed exploration of both our macro views and asset allocation guidance.
Our base case and alternate scenarios
Our base case anticipates a transition to more normal growth and a peaking of inflation in 2022. We also consider two alternate scenarios: The transitory inflation scenario anticipates growth to be higher and inflation lower sooner. The persistent inflation scenario anticipates inflation to remain elevated and the Fed to become more hawkish.
Where are we in the cycle?
While our base case for the global economy may resemble a mid-cycle slowdown, we believe that pandemic-driven disruptions have significantly altered traditional business cycle analysis. Instead, we view the path ahead as one of transition, marked by a period of continued growth but with a falling rate of change as economies digest the pandemic’s extraordinary policy actions.
Sources: Macrobond, Organisation for Economic Co-operation and Development (OECD), and US Bureau of Economic Analysis. As of Oct. 31, 2021. GDP = gross domestic product.
Sources: Macrobond, Organisation for Economic Co-operation and Development (OECD), and US Bureau of Economic Analysis. As of Oct. 31, 2021. GDP = gross domestic product. The G7 is an inter-governmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
What is the direction of the economy?
Following large fiscal programs and very accommodative monetary policy, we see economies slowing from their elevated post-pandemic growth rates into something more normal. We see the US and eurozone approaching trend growth rates as we move through 2022. In China, we see growth moderating into the first half of 2022, followed by a pickup fueled partly by policy support.
Sources: Bloomberg L.P., Invesco, as of Oct. 31, 2021. Dashed lines indicate expected growth path.
What are the policy implications?
Monetary Policy Stance Is Tightening
We anticipate monetary policy tightening in 2022 and beyond. We expect a single rate hike from the Federal Reserve in the second half of 2022, in line with current "dot plot" forecasts. The chart below shows the expected path of Fed monetary policy: balance sheet and rates. Explore our complete 2022 Global Policy Outlook
Sources: International Monetary Fund, US Federal Reserve, and Invesco, as of Oct. 18, 2021.
Less fiscal support expected in G7s in 2022
Policy stances are changing across economies. In G7 nations, we see less fiscal support. Fiscal tightening should be offset by drawdowns of built-up private savings. The chart below illustrates the cyclically adjusted budget balances for the G7 economies.
Sources: International Monetary Fund, US Federal Reserve, and Invesco, as of Oct. 18, 2021. The G7 is an inter-governmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
What if inflation persists?
Risk Scenario: Inflation Persists Without Cooling
In this scenario, we consider the possibility of persistently high inflation leading to an unanchoring of inflation expectations above the 4% mark. We would expect this to force developed market central banks into a more hawkish policy pivot. In this environment, we would expect a curtailment of the economic cycle and would favor defensive assets. If inflation prints continue at their high rate, we see Fed action in play.
Sources: Macrobond, Federal Reserve, US Department of Treasury, and Invesco, as of Oct. 31, 2021.
What if Russia-Ukraine tensions ease?
A significant easing of tensions would likely result in a rebound in global GDP as geopolitical risk premia on key commodities fade more quickly. However, the impacts of lost harvests, destruction of infrastructure, sanctions, and change of energy strategy are likely to have lasting implications, so we would not expect growth forecasts to immediately return to pre-invasion levels or inflationary pressures to disappear completely. We would therefore anticipate more aggressive monetary policy tightening for most major developed central banks under this scenario.
International Monetary Fund (IMF) 2022 growth forecasts, before and with Russia-Ukraine war
Sources: IMF World Economic Outlooks, January 2022 update and April 2022 edition
What are the asset allocation implications?
What does all this mean for investor portfolios? View a quick summary of our scenarios, and drill down into the charts below to see which assets we favor within fixed income, equities, commodities and alternatives.
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Download the full investment outlook
A collection of charts that illustrate the details of our base case and alternate scenarios.
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