Stock investors have been pampered by (very) high returns in recent years. Is it now time to set sights lower? Our equity outlook for 2022 provides information.
We will refrain from making point forecasts for the major stock indices again this year, but we are not bashful about projecting a stock-market trend – our estimation, in any case, is bound to surprise very few people. In the wake of equity markets around the world having delivered double-digit returns (above +15%) for three consecutive years (including 2021 barring a crash during this year’s final trading sessions), there’s a lot suggesting that stock-market gains will come in lower in single-digit percent territory for 2022. Grounds, though, for predicting negative stock returns are lacking, in our view, not just due to the shaky probability of that prophecy coming true (after all, the S&P 500 index has ended the year down for only 24% of the years since 1980), but also because a narrative for a major correction is missing. But alongside the “boring” baseline scenario, this time there are also two fringe scenarios. One is the risk harbored in every stock-market outlook of a more or less sharp downward correction. The other fringe scenario – and this is new – is that we also see certain possibilities of the opposite – an upward acceleration (a.k.a. a melt-up) – happening. In a market melt-up, stock prices would climb massively higher amid increasing volatility like they did at the end of the 1990s. Given today’s high inflation rates, the expression “TINA” (“there is no alternative”) could take on an entirely new meaning. And the fear of missing out on gains would spur even the last (retail) investor standing on the sidelines to jump on the bandwagon. However, the hangover after such a FOMO party would be inevitable because stock prices heretofore have never rocketed to the moon.
(Only) emerging markets lag behind
Another year of rock-solid returns
Regional equity market performance per 30/11
Sources: Bloomberg, Kaiser Partner Privatbank
Meanwhile, the underlying conditions are good for our baseline forecast projecting a solid but unspectacular year for stocks. Economic activity already passed its peak dynamics (as measured by purchasing managers’ indices) more than half a year ago. A small dip in growth accordingly is already behind us for the most part, so the focus is soon likely to shift back to more upbeat data (surprises) and the prospect of another year of above-average global economic growth, on the back of which corporate earnings look set to pick up again. In this sense, a continuation of the bull market would also be underpinned by the fundamentals and wouldn’t depend solely on a further expansion of already lofty market valuations. Speaking of valuations, the relative valuation versus fixed-income assets remains an argument in favor of stocks (and for a high equity allocation in portfolios) again for 2022, as a simple comparison of equity dividend or earnings yields against bond yields illustrates, for example. Moreover, stocks’ value advantage is unlikely to change much in the foreseeable future. That’s because even though moves to return monetary policy back to normal await us next year, it is bound to take much longer than just a few quarters before monetary conditions become restrictive and tarnish the attractiveness of stocks. In this sense, we also think that the US Federal Reserve’s recent sounding of the starting gun for tapering its asset purchases and its eventual initiation of a rate-hiking cycle someday will not be a showstopper that immediately puts an end to the equity bull market. Because if history is a guide to future market developments, the bull market is unlikely to reach its apex until after the last (!) rate hike in the coming cycle.
So, how should an investor position him or herself for the new year? In our opinion, taking big bets on sectors or investment styles is inappropriate because, as was the case this year, there will likely be recurring rotations in and out of sectors and names largely in light of the extremely dynamic macroeconomic and (geo)political climate at the moment. Too much tactical maneuvering is ill-advised in such an environment (and generally often is also unprofitable for long-term investors). In our view, cyclical value stocks sensitive to changes in interest rates and economic activity belong in a balanced portfolio, as do high-quality growth stocks. Such a mix of value and growth stocks should perform well, even if inflation rates stay elevated. Meanwhile, our stance on regions largely remains neutral. Bidding a farewell to an outperformance by the US market is once again inappropriate – doing so would consistently have been premature in each of the last several years. But we are setting one regional accent: we remain very bullish on UK stocks. After years of underperforming, the UK market has recently stabilized relative to other regions. However, its valuation discount is glaringly large, so we see a lot of upside potential for the UK market. Moreover, in a climate in which long-term bond yields are tending to rise, the UK equity market earns another merit point for its comparatively higher dividend yields.