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Aegon AM: Four challenges facing the equity markets in 2022

Stephen Jones, Global CIO, Multi Assets Solutions & Equities, Aegon Asset Management

In an environment of an improving economic backdrop and as the world moves back to normality through 2022, equities should provide a positive return – however, there are a number of themes that may challenge this says Stephen Jones, Global CIO, Multi Assets Solutions & Equities, Aegon Asset Management.

Below, Jones highlights four themes which could pose challenges for performance in the equity markets in 2022:

Central Bank Decisions

“Tighter monetary policy in response to high levels of inflation in many countries is likely to remain a major theme for financial markets over this year. Key for investors will be how aggressively the US Federal Reserve tightens policy over the course of 2022. Post the most recent Federal Reserve meeting there is reasonable probability of seven rate hikes this year as well as quantitative tightening, although this remains fluid.”

Inflation

“Around the world many central banks are increasing interest rates to curb inflation. The surprise to the market could be that inflation recedes quicker than expected.

“The bulk of global inflation surprises has been driven by core durable goods pressure, as accelerating good prices reflect supply chain disruptions. The expectation is for inflation to remain high for the next few months and then decline into year end. The risk to inflation remains if supply disruptions do not abate and high prices become embedded in inflation expectations. However, inflation remains an uncertainty – many of the pressures that allowed inflation to rise sharply could ease in the coming quarters, particularly as consumers move from goods to services. This will have a significant bearing on the extent to which central banks tighten monetary policy this year.”

Global economic growth

“Global economic growth should continue to be firm as economies recover from the pandemic, albeit the pace of the expansion will likely moderate.

“Production should be supported by employees returning to the workforce and this should help ease supply chain bottlenecks. However, governments played a major role in supporting demand over the last couple of years and the removal of this support will likely cause the pace of economic growth to ease.”

Geopolitical risks

“Russia/Ukraine will likely be a slow burn and not a full-blown conflict, but the risks are on the rise. If this risk abates this will remove an uncertainty for the markets, which would ease investors’ concerns.

“Our base case remains on no significant escalation in Eastern Ukraine in the near term but expect tensions to continue as troops and equipment continue to be moved. Ultimately the cost might be too high and the reward too doubtful for Russia to launch a full-blown invasion.”

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