In Brief
- As pandemic effects fade, U.S. economic growth should reaccelerate into early 2022 and then slow for the rest of the year as the economy heads towards full employment. Inflation should ease but remain above its pre-pandemic pace.
- 2022 should see a second year of above-trend global nominal growth, but with more synchronous momentum across regions. This should cause some depreciation of the U.S. dollar, albeit with some fits and starts, due to differences in the timing of monetary policy normalization.
- Central banks are moving to normalize policy due to persistent above-trend inflation and a stronger, more synchronized rebound in global growth.
- Profit growth looks set to drive returns as rising earnings tame current above-average valuations.
- 2022 should be a strong year for international equity market performance across regions, driven by gains in earnings expectations and reasonable valuations. These markets provide investors an attractive combination of both cyclicality and growth.
- International commitments and domestic legislation should maintain momentum in sustainable investing alternatives.
- Low rates and muted expected returns from traditional financial assets have led alternatives to transition from optional to essential.
- Given the nature of the global recovery and shifting pockets of opportunity, sector and security selection across asset classes will be of paramount importance.
Introduction
Two years ago, the U.S. and global economies were rocked by two enormous shocks — the pandemic and the policy response. These two shocks triggered giant waves in economic output, employment and inflation and simultaneously suppressed interest rates while supporting very strong gains in asset prices. However, these waves are now subsiding. For investors, the key to investing in 2022 and beyond is to navigate what is left of these waves and, more importantly, to see how they have altered the financial landscape.
