By Michael J. Kelly, CFA, Global Head of Multi-Asset, PineBridge Investments
Market participants have formed a tight consensus on the likely path of 2021. Even if the crowd is slightly wrong about vaccinations reaching the masses in the spring of 2021, unleashing a step-up in mobility and economic activity in the second half, it is likely these events are now fully baked into asset prices. Unless events come as a complete surprise, it is now a more interesting question to ask what 2022 will look like.
Despite vaccination programs, Covid-19 will still be influencing the global economy to some degree in 2022. While 1 billion people are likely to have been vaccinated by the end of 2021, this would still represent only one-eighth of the global population. Moreover, vaccinations will be concentrated in countries representing half the global economy, as developed market economies had a head start in acquiring vaccine stock. While 2021 will be about lifting the ceiling on growth for most developed economies, 2022 and beyond could be the equivalent for most emerging economies.
In the last decade, monetary and fiscal policy played a key role in determining asset prices. Once herd immunity begins to set in for developed economies, policymakers will begin to think about trimming stimulus. Yet after such a horrific episode, most governments and central bankers will likely drag their feet. This means 2022 will also be about the degree of stimulus withdrawal in developed economies, as well as who moves first, and who drags their feet. Clearly the US will withdraw sooner than Europe or Japan, favoring the latter two in markets.
Most emerging economies went ‘lighter and later’ on stimulus, will receive vaccines later, and thus may well not withdraw stimulus measures in 2022. China, for one, has its next five-year Party Congress in mid-2022. There is no sense in China reducing stimulus before this point, which is a positive for other emerging countries tightly linked to China.
With new administrations starting up in the US and Germany in 2021, the coming year will likely be devoted to rebuilding multi-lateral relations and commitments, leading to 2022 as a year to revisit trade issues – another potential plus for more trade-dependent emerging economies.
Meanwhile, with Europe and China already moving now on reframing regulation of technological platform companies that have been using their status to pre-empt competition, the new US administration will soon also be in search of a new anti-trust theory that does not rely on rising consumer prices as a precondition for taking action. By 2022, the US may take a similar approach to Europe and China, where merely the presence of anti-competitive actions is now enough to presume damage to what “might have been” with respect to smaller firms and the state of competition and innovation.
The question then is what to do in the meantime? How should investors approach asset class positioning in the year ahead? As these trends begin to play out, we’ve grown more bullish on multi-asset allocations overall. Most categories (risk premia, absolute return, total return) struggled in 2016-2019 as ‘end-of-cycle-itis’ herded investors into the safest pockets of capital markets irrespective of valuation. Most multi-asset strategies utilize valuation as a key component of their investment processes. Early on in cycles, valuation turns into a tailgating for many years.
We were bullish on Asia early on in the 2020 recovery given the region’s relatively deft handling of the Covid-19 crisis, which provides a tailwind through 2021. From here, Europe, Mexico and Brazil are next up joining the upswing.
These recovery forces also imply a moderately bullish approach to credit. Central bank support has morphed beyond keeping rates low (which makes credit easier to service) to also making room within their QE programs to support pockets of credit. While recent issuance of corporates has been much greater than anticipated due to strong demand and low absolute yields, supply should slow from here leading to more spread compression.
Likewise, we remain constructive on global equities, expecting them to continue looking beyond Covid-19 and focused on the vaccine-enabled recovery in the second half. While valuations look high relative to their own history, they look cheap relative to government securities. If the latter’s yields stay repressed for a long time, expect P/E’s to stay at these levels. Earnings revisions are trending higher, CEO confidence is strong. The herding within markets into safe zones during 2016-2019 elevated defensive equities. Don’t get caught up between choosing true secular growth versus cyclicals. Own both at the expense of defensives.
Bottom line? With 2021 as preamble, 2022 may well be about selective monetary and fiscal policy withdrawal, a continued broad based healing process with respect to trade, and new anti-trust concepts upon which technological platforms must operate. In the meantime, investment opportunities will be there for the taking.