The end of the year is often a time of reflection, but it is also an opportunity to plan for the future.
While people list new goals they want to achieve for 2022, UBS Global Wealth Management’s chief investment officer, Mark Haefele, has detailed a list of New Year’s portfolio resolutions.
“While mindful of risks around COVID-19 variants and inflation, we keep a positive outlook on stocks for the start of 2022,” he said.
“Global economic growth is likely to remain above trend for the first half of 2022, monetary policy is still accommodative, even if emergency support measures are being scaled back, and we expect 10% growth in global corporate earnings in the year ahead.”
Here are the top 10 resolutions to help get your portfolio and investments set up for a prosperous 2022:
Focus on the future
The first goal is to keep a longer-term perspective amid shorter-term fears. The emergence of the Omicron variant has heightened volatility in the market but it is important to maintain a longer-term focus.
The spread of the new strain sparked fears about restrictions on economic activity and prompted a 3.5% sell-off in global equities between 25 November and 3 December. But early indications that the variant is relatively mild have helped global markets rebound toward all-time highs.
Get more organised
Investors should use this time to take a fresh look at their goals and how they align with their portfolios, UBS said.
“We believe a good starting point to financial planning is to divide wealth into three distinct strategies: Liquidity. Longevity. Legacy.”
First, it recommends that investors set aside enough resources—in cash, bonds, and borrowing capacity—to cover the cash flow that they’re planning to pull from their portfolio over the next two to five years.
By keeping a longevity strategy focused on the medium to long term, investors can avoid the potential risk of overtrading, and allow their portfolio to compound growth over the longer term.
Finally, a legacy strategy holds the assets that may exceed those needed to fulfil an investor’s lifetime goals.
Lose some weight
Excess cash holdings should be put to work. Trimming excess is something many people aim to do in a new year, and considering a trim to excess cash could have benefits too.
While holding cash can be comforting in the short term, it can be bad for your portfolio’s long-term health, particularly when nominal interest rates are lower than inflation, like they are at the moment.
Currently elevated levels of inflation, and near-zero interest rates, mean that the real value of cash is eroding fast.
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Widen your horizons
The report suggests that investors should widen horizons into oft-neglected eurozone and Japan equities.
Many investors have too much exposure to local markets, industries, or companies, it said, and could improve their risk/reward by diversifying into the eurozone and Japan.
Japanese stocks, represented by MSCI Japan, have underperformed global equities by 12%, in US dollar terms, since the beginning of the year. But with 79% of the Japanese population now fully vaccinated, economic recovery is underway, supported by new fiscal stimulus equivalent to around 10% of GDP.
UBS expects a 10% rise in earnings in fiscal year 2022. Japanese stocks also tend to be more resilient than other regions to rising US real yields
Traders should think about boosting their allocation to healthcare next year as the sector is cheap compared to its long-term average, while also offering structural growth.
Over the past 20 years, the global healthcare sector has traded at an average 10% premium to global equities, but today this premium is just 2%.
“Pharma stocks’ relative insensitivity to economic performance should be beneficial as growth normalises in the second half of the year.” UBS said.
“We expect revenue growth to pick up in 2022 as hospital access recovers from the winter COVID-19 wave and the backlog of procedures is dealt with.”
Try something new
Another goal for the new year is trying something new. Having a diversified portfolio is always key for any investor, but with the reduced ability of bonds to act as a diversifier, UBS has recommended exposure to alternatives, including hedge funds.
Hedge funds offer an alternative diversifier with a low correlation to other asset classes, the potential for attractive risk-adjusted returns, and historically less downside sensitivity than equities.
“We think hedge fund managers should be well positioned to generate alpha against a backdrop of monetary policy shifts, desynchronised growth, and inflationary dynamics.”
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Another portfolio resolution is boosting yield unconventionally. The report said: “We expect yields and rates to remain near historical lows, and see limited opportunity in traditional fixed income.
“Investors looking to boost income will therefore need to look for ‘unconventional’ yield sources, including US senior loans, private credit, synthetic credit, active strategies, and dividend-paying stocks.”
It expects only a gradual rise in rates and yields, and US 10-year yields to rise from 1.5% today to 2% by June 2022.
Meanwhile, it expects inflation to average 2.7% in Asia, 2.2% in the Eurozone, and 4.2% in the US, meaning investors holding excess cash or high-quality bonds are likely to experience real wealth destruction.
Save a few more dollars
The US dollar is expected to strengthen further in the year ahead, despite high US debt levels, as the Federal Reserve withdraws monetary accommodation faster than some other major central banks.
In contrast, the Bank of Japan, Swiss National Bank, and European Central Bank look likely to remain more accommodative.
For example, ECB President Christine Lagarde has said that premature policy tightening would be an “unwarranted headwind” for the region’s recovery, and we think the ECB will keep policy loose.
UBS also holds a positive view on oil as demand hits new highs, and a negative view on gold against a backdrop of rising rates and a belief that inflation will fall.
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Learn a new language
After years of talk of the FAANG stocks, UBS thinks tech investors in 2022 and beyond will need to learn a new language: the “ABCs of technology.”
It has forecast that growth in artificial intelligence (AI), big data, and cybersecurity to outpace the broader tech sector, and that investors should look to the small- and mid-cap tech space—as well as private markets—to capture the opportunities they present.
Be more green
Finally, investors should align their portfolios with the drive toward net-zero carbon. The drive to net-zero carbon has emerged as a key theme for many individuals, as well as governments, businesses, and investors.
“We believe it will generate some of the best growth opportunities in the coming decade, from clean energy and carbon reduction solutions to digitalization and electrification.”
With 136 countries, responsible for 88% of global emissions having pledged to reach net zero, the energy transition has become a critical investment theme.
The International Energy Agency (IEA) projects that global renewables capacity will rise to more than 4,800 gigawatts by 2026, an increase of over 60% from 2020 levels. Renewables should account for nearly 95% of the expansion in global power capacity over that period.
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