Jan 27, 2022

Five Things to Look Out for This Year

Last year was the second year in which many of us were stuck at home due to the coronavirus pandemic. Now that 2021 is behind us, many are excited for a fresh start. Here at AIMCo, a new year means new opportunities and updated predictions. In this article, we focus on five things to look out for in financial markets in 2022.


1. Rising Rates

Over the past two years, there has been a drastic rise in the price of goods and services. Government-mandated shutdowns around the world impacted many sectors and businesses. Business closures led to supply chain disruptions and those who remained open had to increase their prices to obtain goods, or to simply continue operating. Rising prices are also linked to the increase in the amount of money circulating in the global financial system. This is a result of government stimulus packages which have helped cushion the economic shock of the COVID-19 pandemic.

As a result of rising prices this year, we can expect central banks around the world to begin raising their benchmark interest rates. With the highest price increases seen in decades, central banks will use interest rates to make spending and borrowing more expensive in order to slow the significant price increases. In addition, the Bank of Canada and other central banks around the world have begun to or signalled that they will remove the accommodative bias of their monetary policies, like tapering quantitative easing (QE) to control inflationary pressures.

Here in Canada and in the U.S., many analysts expect three to five interest rate hikes this year. This will make lending more expensive and could negatively affect household spending and home-buying.

2. Good, Not Great Global Growth

Last year, global growth took off as economies reopened and demand soared. According to the World Bank, global growth came in around 5.5% in 2021. However, with a resurgence of COVID infections, and with threats of inflation and supply chain disruptions, growth prospects are likely to slow this year.

In Canada, the economy is expected to perform well mainly due to strong household spending due to increased household savings rates and recovering labour markets. Canadian exports and overall trade activity is also anticipated to remain robust, helping the national economy grow. In 2022, Canada’s economy is expected to grow between 3.5% and 4.5%.

In the U.S., many leading economic indicators such as durable goods orders, building permits and overall stock market performance show rigour. High rates of consumer spending will continue to be improved by excess savings and improving employment conditions. Despite uncertainties relating to COVID-19, supply chain issues and labour shortages, many expect U.S. economic growth in 2022 to reach more than 4%. Growth prospects could move past that 4% mark if the demand for services grow, and net exports rebound before the second half of this year.

After growing an estimated 8% in 2021, China’s economy is expected to ease around 5% in 2022. This slowdown in growth is partly due to China’s zero-COVID policy, the lingering effects of the pandemic as well as additional regulatory tightening from Beijing which has been used to combat the country’s frothy real estate market.

Emerging market (EM) countries, excluding China, enter 2022 with mixed prospects. Lower vaccination rates in certain EM countries are making a significant rebound more doubtful. Some emerging countries have raised policy interest rates to fight inflation, while others are reacting slowly to this trend. This year, consumer inflation should remain high (above 5% in some instances) across emerging markets. That leaves economic growth amongst the key EM countries to likely fall below the 5% mark.

3. Not the Same Stock Story

Despite operating in a global pandemic for the second year running, North American equities markets finished 2021 near record highs. This year however, it’s unlikely that the trend will continue.

COVID-induced supply chain disruptions, surging energy prices, cost inflation pressures and wage pressures have begun to blur short-term earnings for publicly traded companies. This downward pressure on margins is from greater input costs. In addition, investors can expect central bank monetary policy (e.g. rate increases) to be a dominant force influencing markets’ trajectories this year. As central banks shift, markets will move accordingly. Any change in overall market sentiment remains one of biggest risks to markets’ performances this year.

Like North America, a similar story is likely to unfold in Europe. However, in Asia, Chinese President Xi’s regulatory crackdown on gaming and internet platforms and on Chinese real estate have global investors wary of broad Asian exposures.

As a result, compared to recent historical public equities market returns, projections for the main global stock exchanges are more modest than last year.

4. Boring Bonds?

In light of current inflationary pressures and a strong economic rebound last year, central banks will begin raising interest rates this year. In response, fixed income markets have begun pricing in a higher rate environment.

Typically, bonds have an inverse relationship to interest rates. For example, when the cost of borrowing money rises, bond prices usually fall. For those looking to invest and save at higher rates, rising interest rates may sound enticing. However, higher interest rates are likely to become less appealing to those who own bonds primarily because they want prices to rise.

With more central banks likely to jump on the rate hiking cycle bandwagon this year, the benefits to savers will likely be modest and bondholders will likely feel more disappointment this year. Expect yield increases to be restrained, however, by central banks’ desire to fight inflation and foster economic normalization against the sheer volume of global debt that has been used to stave off economic instability relating to COVID.

This isn’t the best news over the near term, but other portions of the fixed income spectrum, such as private debt, will continue to set up other opportunities for investors, such as offering liquidity and diversification in portfolios.

5. Impressive Illiquid Assets

With high vaccination rates and the lifting of work-from-home orders, illiquid assets could have a promising year. The swift increase in demand in 2021 caused shortages and price increases for many goods and commodities. The construction sector is a great example of how last year is providing a promising 2022.

Last year, labour and goods shortages caused a runup in costs and the building of new properties was significantly impacted. Now, with a limited supply of new buildings, investors are exhibiting a strong appetite to own real estate resulting in high transaction figures and volumes.

There are also promising trends that are translating to an appealing backdrop within illiquid assets. For instance, growing online retail sales will continue to positively impact real estate investment trends and have translated to growing demand for logistics and last-mile distribution facilities. In addition, renewed interest and return to urban centres are reinforcing urbanization trends driving demand for real estate in dense urban areas, with multi-family apartments being a primary beneficiary of these trends.

Other areas with significant upsides this year include consumer, healthcare, technology, telecommunications and renewable energy and power. Such opportunities are likely to represent key drivers of sustained performance across the private equity, infrastructure and renewable resources universes.

Financial markets have come a long way since the onset of the pandemic. While markets and economies around the globe are still recovering from COVID-19, this year is likely to prove that we’re on a path to normalization.