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Growth will slow in 2022 but settle at an above-trend rate for the second consecutive year. We expect the US to outperform Europe and Japan where the fiscal drag is expected to be significant. Growth will also slow in emerging markets led by China and Brazil but offset somewhat by stronger growth out of India, projected to again be the fastest-growing major economy in 2022.

The current inflation episode will fade in 2022 as the largest surge in demand since WWII eases while supply adjusts. Some inflation may linger through wages but this will be balanced by deflationary forces from an expected inventory over adjustment and technological disruption.

Divergence in the outlook for monetary policy will feature in 2022 as some central banks (mainly in emerging markets) respond to inflation while others take a more patient approach (mainly in developed markets). Central banks can only step in to dampen demand. Supply problems need time to auto correct.

The fiscal tailwind during the pandemic will turn into a headwind in 2022 as governments around the world pull money out of their economies. The turn to austerity is estimated to be five times larger than that experienced in the wake of the 2008 crisis and will mostly be a developed economy problem.

Fixed rate bonds remain expensive and continue to offer little in the way of income, diversity or stability within a portfolio. Credit spreads are at historically tight levels, which leaves minimal room for error. Strong fundamentals, however, reduce the risk of default.

Corporate fundamentals are strong, funding costs are still relatively low and margins are holding up. Higher input costs are for the most part being passed onto consumers, insulating equity investors from the sting of inflation.

As a starting point, our preference for Australian-domiciled investors is to be 100% unhedged on their international equity position. This serves as a cushion in the event of a sell-off in international equities where the US dollar tends to rise against the Australian dollar.

In general, alternatives offer the most attractive risk-adjusted returns for investors and will continue to do so in 2022. In particular we like private debt for yield and private equity for growth. Unlisted infrastructure is benefitting from the acceleration of the renewables theme.


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