2022 Market Outlook

2021 was another stellar year for equity markets. Most major market indices delivered double-digit gains and, for some, it was the third-straight year of returns above 10%. In contrast, it was a tough year for bond markets, as investors began to worry about the prospect of higher interest rates to combat rising inflation.

The good news for investors was that our funds continued to perform well, benefiting in particular from their holdings in international and Australian equities, listed property and listed infrastructure investments.

As we head into 2022, unsurprisingly, COVID-19 remains the major news story, with the new Omicron variant now the dominant one. While this has the potential to unsettle markets, we are optimistic about the prospects for financial markets this year, as we expect global economic growth to continue to recover.

Here are some key themes heading into 2022.

Inflation is likely to remain one of, if not the key issue that investors will face in 2022. The prices of goods and services have risen to decade-highs, due to supply shortages brought about by the global pandemic, as well as tight labour markets the world over. While we expect these pressures to ease, inflation is expected to remain at above-average levels, meaning interest rates will have to rise to take the steam out of the economy. Of course, a key risk is that inflation stays high, meaning central banks may be forced to raise interest rates even faster.

When the global pandemic hit in early 2020, most major central banks cut interest rates in unison to support the global economy. As economies recovered, many also expected them to begin raising them at around the same time. However, this has not been the case.

Central banks appear to be at different stages of their interest rate cycle. For example, interest rates have already moved higher in New Zealand and the UK, while in the US the Federal Reserve has just started talking about it. Meanwhile, in Europe and Australia, central banks appear to be some way off from taking action.

New Zealanders have enjoyed new-found freedoms thanks to high levels of vaccination, the introduction of vaccine passports and the promise of a gradual reopening of New Zealand’s borders. However, the outlook for the local economy looks challenging. While the economy has performed well (despite recent lockdowns), rising prices and labour market pressures have prompted the Reserve Bank of New Zealand (RBNZ) to raise interest rates. We expect this to continue into 2022 and should help to cool the economy.

But, from an investment perspective and despite the relatively muted outlook for domestic equities and bonds on the back of rising interest rates, there remain a number of quality companies which will continue to adapt and thrive in this ever-changing environment.

Growth, like inflation, will remain above-trend, albeit at a lower rate to last year. In 2021, the global economy grew at a rapid pace, as economies reopened following the roll-out of new vaccines. While the threat of Omicron is real, the big difference this time is that vaccine manufacturers should be able to adapt current vaccines to better target the new strain. This should be supportive of global growth, given that these could be delivered as soon as the first quarter of this year.

Meanwhile, company earnings should also be supported by strong demand, as consumers spend savings that they accumulated during prior lockdowns. And even if demand from consumers is not as robust as hoped, factories may well be able to increase production as they look to replenish extraordinarily low levels of inventories.

From an investment standpoint, 2022 is shaping up as a challenging year for investment markets. Nevertheless, no matter what the year brings, we believe our active management approach will help to smooth out any bumps in financial markets and capitalise on the opportunities.

Just as we did before, and during the pandemic, our focus will remain on quality companies and assets that exhibit strong governance and values. This approach, we believe, will continue to serve our investors well, targeting above-average returns, on a consistent basis and over the long-term.

Furthermore, we continue to place growing importance on our approach to responsible investing. Interest from investors will grow as they demand both accountability and transparency of company targets and their progress towards climate-related goals and reducing carbon emissions – areas we’ve been making some great inroads on.