Team expects above-trend economic growth, declining inflation after early-year peak, and moderate investment returns with non-U.S. equities finally outperforming U.S. stocks
SEATTLE, December 7, 2021 — Russell Investments’ strategists forecast 2022 as a year of moderation for economic growth, inflation and investment returns, and they believe the global economy is poised for another year of growth. Overall, the team’s 2022 Global Market Outlook maintains a moderately positive medium-term view on global equities.
“After a year of rebound and recovery for global markets in 2021, we expect 2022 will be a year of moderation,” said Andrew Pease, global head of investment strategy at Russell Investments. “Developed economies have spare capacity, households are sitting on accumulated savings from the pandemic lockdown, and central banks are planning to gradually remove accommodation. We expect above-trend growth in 2022, although slower than 2021.”
Identifying their three main uncertainties for 2022 as inflation durability, a slowdown in China, and new COVID-19 variants, Russell Investments’ strategists continue to see the 2021 inflation spike as mostly transitory. Although it could reach uncomfortably high levels in early 2022 before declining as supply-side issues are resolved. Meanwhile, they expect China will implement stimulus measures to soften the property slump and prevent a deeper downturn. Regarding COVID-19, they note that the success of vaccines and approval of pills to treat infections have made investors more relaxed, but the new omicron COVID-19 variant demonstrates that pandemic-related risks can quickly return.
Russell Investments’ cycle, value, and sentiment (CVS) investment decision-making process continues to score global equities as expensive, with the U.S. as the most expensive developed-equity market globally and the U.K. as the best value. “The cycle is still supportive for equities, and it’s becoming a larger headwind for government bonds,” Pease said. “Sentiment for equity markets is mixed with pockets of euphoria, such as single-stock retail investors, offset by caution from surveys of market analysts.”
The team’s asset-class preferences for 2022 include:
- Prefer non-U.S. equities to U.S. equities. “Above-trend global growth and steeper yield curves should favor undervalued cyclical value stocks over expensive technology and growth stocks,” Pease said. “Relative to the U.S., the rest of the world is overweight cyclical value stocks.”
- Expect emerging markets (EM) equities to remain under pressure from the economic slowdown in China as well as central bank tightening across other EM economies to contain inflation pressures. “EM equities could do well if there is significant China stimulus early in the year, the Fed stays on hold, and the U.S. dollar weakens, but otherwise, they face headwinds heading into 2022,” Pease said.
- See high yield and investment grade credit as expensive on a spread basis, though they have support from a positive cycle view that supports corporate profit growth and keeps default rates low.
- View government bonds as expensive with yields facing upward pressure as above-trend growth closes output gaps. “We expect the U.S. 10-year Treasury yield to rise toward 2% over 2022,” Pease said.
- Real assets: Believe real estate investment trusts and global listed infrastructure should continue to benefit from the pandemic recovery. Commodities, which have been the best-performing asset class in 2021 amid strong demand and supply bottlenecks, will likely retain support from above-trend global demand, even as the slowdown in China limits upside potential.
- Expect the U.S. dollar, which has been supported by expectations for early Fed tightening and U.S. economic growth leadership, to weaken as global growth leadership rotates away from the U.S. and as expectations for early Fed tightening are unwound. The team believes the main beneficiary is likely to be the relatively undervalued euro. The strategists also believe British sterling can make further gains in 2022, and they see upside potential for the Japanese yen.
Additional expectations covered in Russell Investments’ 2022 Global Market Outlook include: Equities should outperform bonds; long-term bond yields should rise modestly; non-U.S. developed market equities could finally outperform U.S. stocks; and the value equity factor will likely outperform the growth factor. For more information, please see the strategists’ 2021 Global Market Outlook.
About Russell Investments
Russell Investments is a leading global investment solutions firm providing a wide range of investment capabilities to institutional investors, financial intermediaries, and individual investors around the world. Building on an 85-year legacy of continuous innovation to deliver exceptional value to clients, Russell Investments works every day to improve the financial security of its clients. The firm is the world’s sixth-largest investment adviser, with $2.9 trillion in assets under advisement (as of 6/30/2021) and $330.1 billion in assets under management (as of 9/30/2021) for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments has offices in 18 cities around the world, including in New York, London, Toronto, Tokyo, and Shanghai.
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