1Q 2022 | Guide to the Markets
The economic tailwinds are strong and monetary tightening won’t derail the recovery
In 2022 we do not see any shortage of desire to spend. Households have accumulated savings over the pandemic and rising asset prices have resulted in a jump in net wealth (Guide to the Markets – Europe pgs 10 & 18). Companies are investing and governments have already set in train multi-year spending plans (pgs 17, 26, 33). In the near-term, ability to spend may be constrained by restrictions needed to contain the spread of Omicron. However, demand looks likely to be diverted and delayed but, importantly, not destroyed. With inflation pressures lingering, particularly in the labour market (pgs 24, 28, 37), central banks will begin raising interest rates but not by enough to hamper growth (pg 9).
Costs won’t stop profits growing
Strong nominal growth should support another good year for corporate earnings globally. Cost pressures are likely to remain elevated but in large part we expect companies to pass these on to end consumers and protect their margins, as we saw in 2021 (pgs 13 & 64). Current consensus forecasts for earnings in most major regions look too modest in our view (pg 46).
Value offers value
A broadening economic recovery and rising interest rate environment has the potential to change the patterns of market leadership from those observed in recent years. World growth stocks currently trade at a price-to-earnings ratio of 29.3 compared to value at 13.5 (pg 51). Value stocks should have scope to perform well if the macro backdrop plays out as we anticipate. This would argue for a more geographically diverse portfolio compared to the last two years when growth dominance heavily favoured the US.
China remains a compelling opportunity
In 2021 investors were unnerved by concerns about the Chinese property market and several regulatory announcements from Beijing. Our interpretation is that these reflect a desire to see more sustainable and inclusive growth, albeit at a lower level (pg 45). The spread of Covid may weigh on economic activity in the near term, but the medium-term outlook for corporate earnings is still compelling and valuations are now attractive given the reset last year (pg 46).