(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.
2023 Annual Investment Outlook
We expect inflation to moderate and central banks to pause tightening in the first half of 2023, which should help take the global economy from the current contraction to a recovery regime and set the stage for the next market cycle.
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
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?
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.
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.
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.
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.
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.
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.
In this scenario, we hypothesize that current fears of inflation could prove to be excessive, with inflation in major developed countries falling to 2% or below. We would anticipate growth to be higher than normal in this environment, ultimately pointing to economies being earlier in the cycle than we currently judge, which would cause us to favor cyclical assets.
Factors that could cause inflation to moderate in 2022:
Temporary supply-side issues fading.
Commodity and freight prices are partly surging on temporary, pandemic-induced supply factors. We believe this to be transitory. Prices appear to have already peaked for used cars, many commodities, freight and a number of other goods.
Slack remains.
Capacity utilization remains depressed, indicating supply-side slack. We also anticipate labor market normalization as more workers return to the workforce, allevating some wage pressure.
Spending re-orienting.
Spending had shifted into goods due to social distancing as reopening continues, spending is likely to continue to rebalance more to services.
Pent-up demand is fading.
Pent-up demand has been elongated by supply chain issues. Its impact on inflation should be a one-off and relatively short-live factor.
Fiscal stimulus is fading.
Fiscal stimulus is expected to drop in 2022, which is likely to reduce overheating risk.
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.
Read more outlooks
Download the full investment outlook
A collection of charts that illustrate the details of our base case and alternate scenarios.
Investment risks
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The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Important information
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The opinions referenced above are those of the author as of 30.11.2021.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice
