“The real pockets of value are in areas that are unattractive for a significant number of investors – energy, mining, China’s property sector, Brazilian and Turkish equities – but there is plenty of relative value in equities.”
“We expect cyclical value markets and sectors to outperform in 2022 as economies continue to re-open and yields rise. That includes Japan, financials, property, and US small caps. If the regulatory crackdown eases, Chinese tech stocks have significant underperformance to make up for.”
“In Europe, we like the UK for its value-tilt, very cheap valuations and a weakening currency. Italy and Spain also look attractive.”
“The US is a bit more nuanced. US equities can look very expensive. But earnings will likely rescue returns in 2022, surprising again on the upside due to higher profit margins. Analysts are too optimistic on the evolution of profits in the medium term, however, with taxes, interest costs and wage bills all set to rise.”
“Whilst we remain very cautious on emerging market (EM) equities (and EM assets in general), a rotation back to those markets is likely in the second half of 2022. Overall, we maintain a cautiously optimistic outlook on equities.”
“Fixed income investors should brace themselves for another challenging year. US Treasuries will likely post losses on the year even though yields on the 10-year note will struggle to rise above 2 per cent. And with real yields on inflation protected bonds at an all-time low, this part of the market will also fail to deliver for investors.”
“Markets are pricing in the possibility that central banks in the US, euro zone and the UK will have raised interest rates by at least once by the end of 2022. This may appear overly hawkish, but conditions for bond investors are at their most bearish in a decade – not least because valuations across fixed income asset classes are high.”
“Hence, investors will have to look harder to achieve gains. We like Japanese inflation-protected bonds. Japan’s real rates are higher than those in the US and UK. The country’s inflation is rising as a weak yen pushes up import costs. We also like US leveraged loans, which have attracted significant inflows this year thanks to low duration and a floating rate.”
“Corporate credit will struggle in the coming year as developed market corporate spreads stand near record lows in both investment grade and high-yield markets.”
“But we see relative value in short-duration corporate bonds, especially in EM.”
“Based on current yields and duration, short-term bonds will allow investors to better insulate themselves against volatility from interest rate fluctuations without giving up much yield.”
“We see little value in euro zone and other developed market government bonds. Furthermore, overbought inflation-protected bonds are unlikely to offer attractive gains and look unlikely to be able to repeat their year-to-date return of 6-7 per cent.”
“In emerging markets, we see value in Russian bonds, which offer a high real yields and where the central bank is at an advanced staged of the tightening process. We think EM corporate bonds are particularly attractive. These dollar-denominated bonds offer low duration and default rates are likely to stay low thanks to rising commodity prices.”
“In currencies, we expect the US dollar to remain strong whilst we think sterling will weaken as the UK economy may struggle to absorb interest rate hikes and fiscal tightening. Other currencies, such as the euro and Swiss franc, should remain rangebound against the dollar.”
