Equities in favour, but watch for inflation risks: Russell Investments

2022 outlook report sees support from above-trend economic growth and other factors, though valuations are a concern

Equities in favour, but watch for inflation risks: Russell Investments

Even amid the climate of pandemic-induced pessimism, some bulls are insisting that the world will recover from its economic funk. But nobody’s saying it will be easy.

In the 2022 Global Market Outlook from Russell Investments, analysts from the firm maintained that the business cycle is still supportive for equities even as it develops into a larger headwind for government bonds.

“Equities should be supported by above-trend economic growth, solid growth in profit and central banks that are only slowly removing accommodation,” they said in the report, which was published prior to December policy announcements from the Bank of Canada and the Federal Reserve. “These same factors will put upward pressure on government bond yields, but this should be modest.”

Based on its cycle, value, and sentiment investment decision-making process, the firm found global equities were expensive, with lofty valuations being of most concern in the U.S. equity space. Above-trend global growth and steeper yield curves, they added, should be more favourable for undervalued cyclical value stocks than technology and growth stocks, in which the U.S. is overweight compared to the rest of the world.

It should be to nobody’s surprise that the report highlighted inflation as the first among its list of concerns heading into 2022. While the analysts cling to the belief that it will prove mostly transitory, they said that may not become evident until the middle of next year.

Focusing on the U.S. economy, the report cited moderating demand, a swing in demand from goods to services, and a return to pre-pandemic form in the supply side of the recovery as factors that would allow U.S. inflation rates to throttle down aggressively in the second half of 2022. That forecast is challenged by the possibility of elevated wage inflation with exceptionally strong labour demand, the report said.

Inflation as measured by the U.S. consumer price index hit a 39-year high of 5.7% in November, the country’s Commerce Department reported late last month.

“Policy announcements and credit trends will be important watchpoints over coming months,” it said.

Another persistent risk is the lingering threat of COVID-19, particularly new variants that are impervious to current vaccines.

“We don’t yet know the implications of the omicron variant, but it highlights the uncertainty that exists around COVID-19 scenarios,” the report said. “Markets will be volatile around news of rising COVID-19 cases.”