Global economic expansion will continue over the next 12 months, inflationary pressure will begin to ease, central banks will gradually tighten monetary policy and equities will remain more attractive than bonds. Virus variants such as Omicron and supply bottlenecks will contribute to volatility. But China will rebalance, infrastructure spending will rise and innovation will accelerate, while sustainability is likely to continue to move towards center stage.

That is the view of Bill Street and Daniele Antonucci, Chief Investment Officer and Chief Economist, respectively, at Quintet Private Bank, which today released Counterpoint 2022, its forecast for the global economy, financial markets and key asset classes.

Reflecting expectations of worldwide growth of 4.3% in 2022, down from 6% in 2021, Street and Antonucci highlighted five core convictions for the next 12 months, including the implications for investors:

1. MOVING PAST THE PEAK

With the boost from reopening behind us, pent-up demand now spent and less intense levels of policy stimulus, cyclical acceleration is no longer the dominant driver of the global economy. Just as it will eventually move past Covid-19 over time, the world is now “past the peak” of growth. In this normalizing environment, asset prices will be driven by the tug of war between slowing growth rates and still improving activity levels.

“Average equity returns tend to be lower during periods like this one,” said Street. “That means that investors will have to work harder to find value by looking for areas where the dislocation is greatest and growth continues to create opportunities. That could include sectors like consumer goods, industrials, commodities, materials and energy. Meanwhile, as supply chains are repaired and international trade resumes more fully, global companies should be best placed to thrive.”

2. OFF THE LOWS

Inflationary pressure resulting from pandemic-induced supply-demand imbalances has proved more persistent than many expected but will begin to ease in 2022. At the same time, as economies adapt to reduced levels of policy support, bond yields are set to move gradually higher.

“Government debt levels are extremely high, and central banks must ensure that funding costs remain affordable,” Antonucci said. “As the Bank of England and the US Federal Reserve will hike rates before the European Central Bank, we consequently expect a stronger sterling and US dollar and a weaker euro. China may also allow its currency to weaken to boost international competitiveness.”

3. EASTERN PROMISES

China is in the midst of a structural transition from an export-led model to one driven by domestic demand, from investment to consumer spending and from manufacturing to services. To effect that change, the world’s most-populous nation – and, in the future, the world’s largest economy – will need to put in place appropriate institutional and regulatory infrastructure. As China pursues such long-term development, it has also outlined plans to hit peak greenhouse gas emissions by the end of the decade and “net zero” before 2060.

“Investing in emerging markets comes with a risk premium, but we see plenty of opportunities, especially in Asia, where both reform prospects and the ability to cope with higher interest rates appear positive,” said Street. “The deleveraging of China’s real estate sector could create additional volatility, but very high default rates are already priced in, enhancing the attractiveness of Asian high-yield bonds. China’s ongoing structural transition is likely to boost strategic technology and advanced manufacturing sectors – further supported by currency depreciation – as well as services.”

4. NO PLACE LIKE HOME

Even if some of the earlier starry-eyed plans to “build back better” have been scaled back, global infrastructure spending will rise in 2022. Recognizing the existential threat of climate change, policymakers will seek to align such investments with sustainability considerations. That will have a knock-on effect on parts of the real estate sector, as well as areas like logistics and warehousing.

“Long-term infrastructure investment – including in roads, bridges and railroads, as well as in areas such as healthcare and social welfare – is now a structural macroeconomic trend,” Antonucci said. “State spending will accelerate, complementing significant private investment and lifting overall growth. Companies operating in sectors linked to the wider infrastructure topic can benefit from this global trend; those that can also increase a project’s green bona fides could become very big winners.”

5. INNOVATION NATION

Coming out of the pandemic, ongoing technological advances will boost productivity and continue to disrupt entire sectors of the economy. Improvements in automation, digitalization, artificial intelligence, e-commerce and remote computing will continue to be fueled by massive research & development spending. At the same time, high levels of capital expenditure – particularly in intellectual property, sustainability and infrastructure – will also support job creation and overall growth.

“In 2020, Covid-19 caused the steepest productivity drop in history,” said Street “Despite short-term uncertainty, the pandemic’s most enduring legacy may be the structural shift that came out of it: long-term public and private investment in innovation that is changing how we produce and consume goods and services, how we work and live, and how we identify ‘value’ in a company. In this new world, what makes companies valuable is not just physical production but also something far less tangible: ideas and a network of relationships to give life to innovation.”

Quintet’s full Counterpoint 2022 is available at: https://www.quintet.com/counterpoint-outlook