As the world “gets back to business” in 2022, a cautiously optimistic outlook seems warranted. For investors, it may be a year to think thematically.
With some luck, and a bit of hope, we are cautiously optimistic that 2022 should be the year in which most of the world begins to move towards a post-pandemic era — albeit after many fits and starts along the way. From a public health perspective, COVID vaccination rates and other telling numbers (including case counts, hospitalisations and virus-related deaths) suggest that the life-altering global pandemic may finally be poised to start winding down. In addition, many world economies are growing and appear to be on a path to recovery from the unprecedented COVID shock.
To be clear, we are not out of the woods just yet. The virus, with its multiple potential variants and its ability to “break through” vaccine-induced immunity in some cases, has proven difficult to entirely vanquish. And even if (as we expect) next year does bring meaningful progress, it’s critical to stress that it will not be a truly “post-COVID” world in 2022, as the virus may remain in global circulation for years to come. Nor will the economic and other improvements we anticipate be sudden or universal. Many countries still lack adequate vaccine coverage, whether due to ongoing supply issues or vaccine hesitancy among their populations. And lingering challenges around international travel and other activities we took for granted pre-COVID may well persist for the foreseeable future, making a full reversion to completely “normal” conditions an uncertain prospect anytime soon.
Nevertheless, barring a virus mutation that renders the vaccines ineffective, or some other unexpected plot twist, 2022 will hopefully mark the start of a long-overdue global rebuilding process.
The big picture: shifting tectonic plates
One of the overarching questions we keep hearing is: what exactly are we rebuilding towards? COVID has undeniably reshaped the global landscape in many ways, accelerating some long-range trends, blunting or stalling others, and indeed ushering in wholesale, lasting changes to how we live, work and travel. Could these changes cause a return to the type of slow-growth world we experienced after the 2008 global financial crisis, or are we instead pivoting to a period of sustained stronger growth? Will inflation stay stubbornly high and if so, for how long? These are some of the vexing “head scratchers” that are coming to the fore as we head into 2022, but which will take time to fully answer.
But one thing seems fairly settled at this point: COVID has hastened the onset of “big picture” structural changes to how we operate and what we value. These types of secular changes, as opposed to the cyclical changes associated with the nature of business cycles, are like the shifting tectonic plates of the investment terrain: hard to see on a day-to-day basis, but powerful longer term and, ultimately, arguably more significant than anything else. Despite the many unknowns still facing the world, here are five themes that we think should play a more prominent role in investors’ toolkits as we march inexorably towards a brave new future.
Theme 1: Adapting to rising inflation
We think the supply-chain bottlenecks that are plaguing much of the world these days are unlikely to be resolved very quickly. We believe next year could easily see mismatches between supplies of many goods and demand for said goods continue (or even worsen), as more countries reopen and global economic activity picks up. Since supply constraints have been a key driver of rising inflation, we believe the most likely outlook for inflation in 2022 is that it will remain above historical average and more elevated than it has been for years. This, in turn, would likely lead to higher bond yields, especially with major central banks preparing to taper their quantitative easing (QE) programmes and laying the groundwork for interest-rate hikes going forward.
The dual spectre of rising inflation and higher bond yields has potential implications for an array of asset classes (few will be unaffected), but will, in our view, offer pockets of opportunities in more flexible fixed income strategies, as well as global macro strategies and those with an explicit mandate to mitigate the effects of inflation.