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The post-COVID world: an investment outlook for 2022

·Business Reporter
·4-min read
NEWCASTLE UPON TYNE, ENGLAND - DECEMBER 08: Nurse Maddie Bransfield draws up the Moderna Covid-19 booster vaccinations at the Centre for Life Vaccination Centre on December 08, 2021 in Newcastle upon Tyne, England. The Centre for Life vaccination centre was one of the first such large-scale sites opened in the country as the UK rolled out its Covid-19 vaccine programme. The site initially welcomed NHS workers before opening to the public in January. (Photo by Ian Forsyth/Getty Images)
The recovery in 2021 has been driven by unprecedented government funding and pent-up consumer demand, but it has also been hindered by the emergence of new, more transmissible virus strains. Photo: Ian Forsyth/Getty Images

This year saw the global economy start its bounce back from one of the worst years in history after the coronavirus pandemic spread across the world and tore into a number of industries.

Following national lockdowns to prevent the spread of COVID-19, the recovery in 2021 has been driven by unprecedented government funding and pent-up consumer demand, but it has also been hindered by the emergence of new, more transmissible virus strains.

Looking ahead to next year, the world will continue to tackle the social and economic challenges presented by the pandemic, with investors still navigating through economic uncertainty.

“As we head into 2022, we are hopefully also heading towards a post-COVID world, albeit one in which the uncertainty of the economic path is likely to lead to heightened volatility,” Rob Gambi, Global Head of Investments at BNP Paribas Asset Management, said.

“With uncertainty comes opportunity, and scope for active managers to add value.”

BNP outlined a number of key areas of focus next year:

Inflation

Rising inflation has taken centre stage in recent months and ongoing pressures are likely to persist through next year and into 2023.

Although central banks have reiterated the view that inflationary pressures are likely to prove transitory, they could be strong and persistent enough to force the Federal Reserve to tighten sooner than it has projected, as well as in the EU and UK.

“For investors this would translate into concerns around the near term path for policy rates rather than medium-term inflation, which is likely to revert to target,” the research said.

UK inflation stood at 4.2% in October, soaring to its highest level in 10 years thanks to a rise in fuel and household energy costs. This is more than double the 2% target set by the Bank of England (BoE).

Meanwhile, the US consumer price index climbed 6.2% in October, according to the Bureau of Labour Statistics, the fastest increase since November 1990.

Watch: What is inflation and why is it important?

Green economy

Financing the transition to net zero has become a critical requirement for a lot of investors as they look to actively engage with companies that are committed to delivering change.

In 2022, there is expected to be an increased focus on the climate crisis.

“The pandemic has reminded investors of the importance and reality of sustainable long-term growth,” BNP said.

“Investing for the long term will be vital, as the typical three to five-year investment cycle is shorter than the lifespan of financing the shift to green hydrogen or the innovation required to achieve e-mobility, restore natural capital or build green infrastructure.”

Read more: UK must mandate top firms to plan for net zero, warns WWF

Earlier this year, data from OnePlanetCapital revealed that the environmental, social and governance-based investment market is set to double this year, with 12% of traders planning to move investments to ESG related funds.

Three quarters of the 2,005 UK investors surveyed said investing in businesses that tackle climate change, or have a positive impact on the environment, is important to them, while 70% of investors admitted that they would avoid investing in a business with a negative societal, corporate governance or environmental impact.

Markets

The study revealed that equities may struggle to generate above-average returns in 2022.

“This year is likely to be the fourth consecutive year of US equity outperformance relative to the rest of the world. If history over the last 50 years is any guide, 2022 could see lagging returns as previous US winning streaks have never exceeded four years.”

However, European equities could make up lost ground with their US peers next year, while the wide valuation gap between value and growth stocks, and the prospect of higher interest rates, suggest that value stocks could begin to reverse their underperformance.

Read more: Stock market rally continues in Europe despite rising Delta infections

From a regional perspective, China remains crucial to the investment outlook of 2022.

It is the world’s fastest growing major economy, home to several innovative companies and a market that increasingly warrants a standalone allocation within multi-asset portfolios.

Households

Some production constraints are expected to remain well into 2022, but will eventually be resolved and enable economies to revert to trend growth rates without generating higher inflation.

Substantial accumulated household savings may prompt increased consumer spending, possibly switching from goods to services.

However, if the after-effects of living through a global pandemic do inhibit consumption, governments and central banks may need to encourage demand, BNP said.

Pressure on wage inflation should reduce as employers adjust processes and invest capital to reduce their dependence on labour.

Watch: Inflation main risk to economic outlook says OECD

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