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LGT Private Banking Europe House View – January 2022

January 5, 2022

Due to declining liquidity supply, the focus is shifting to fundamentals and corporate earnings reports. Within equities, we identify catch-up potential in the consumer staples sector and in European insurance companies. In the bond universe, we continue to favor less rate-sensitive segments such as corporate and financial hybrids.

LGT Private Banking Europe House View

Investors will remember 2021 as an above-average strong year on stock markets. Global equities did significantly better than bonds, and commodities even outperformed equities. Within the equity segment, US stocks were once again at the top, followed by European shares. Meanwhile, emerging market equities had a difficult time, not least because of the rising US dollar and regulatory trends in China. However, in our view the sentiment on capital markets will change in 2022. 

Fundamentals to replace the liquidity flood factor

Last year, massive monetary and fiscal policy support measures were the main drivers for risky assets. The extent of the liquidity injection can be seen, for example, in the inflows into equity funds, which in 2021 were larger than in the previous ten years combined. In the coming months, however, this liquidity flood will diminish. Thus, central banks will reduce the supply of money, as the Federal Reserve (Fed) has already announced in the fourth quarter of 2021, and the fiscal packages of the G7 governments are likely to shrink significantly as the negative effects of the pandemic fade. 

Inflation will be the big unknown this year

This puts the spotlight on macroeconomic data as well as on corporate earnings. The consequence will not only be higher volatility in the equity market, but fluctuations are also likely to increase within risky assets as well as in cross-asset comparison. In the months ahead, we expect the risk pendulum to swing frequently between ”risk-on“ and ”risk-off“. Global economic growth remains supportive in the coming quarters and should remain above potential in 2022. The big unknown this year is inflation. This raises not only the question of when we will see lower inflation rates again, but also how capital markets view inflation trends over the medium- to long-term. 

Relative versus absolute values

On the macroeconomic side, we will see both positive and negative surprises over the course of the year, depending on whether we focus on relative changes or absolute values. On an absolute basis, corporate numbers and macroeconomic data should continue to be supportive for capital markets. A view, investors with a medium- to long-term investment horizon should take.

Turning point

The shift from a liquidity-driven environment to a fundamentals-oriented market will lead to higher volatility in most asset classes. However, with the right investment strategy and tactical positioning, uncertainties in the following quarters should be manageable. 

Equities remain an important component

In terms of asset allocation, equities remain a key building block despite the rally in December. Return expectations for 2022 are significantly lower than last year and below the historical average. For risky asset classes seasonality should continue to be supportive at the start of this year. Nevertheless, we recommend taking profits on positive exaggerations. In a cross-asset comparison, bonds remain underweight.

Earnings season as first indicator

On an absolute basis, the major equity indices are in the top quartile in terms of valuation. The earnings season, which starts in the second half of January, is likely to be the first indicator for financial markets. Corporate earnings reports will provide important clues as to what we can expect from the respective industries and sectors in the course of the year. We see potential in insurances as well as in non-cyclical consumer staples. At country level, the US and Japan are our favorites, and we see catch-up potential in small and mid-sized US companies.

Attractive niche segments

The fixed income space was challenging for investors already before the corona pandemic, especially in the reference currencies Swiss franc and euro. Now the situation has even deteriorated. As a result, the ”buy and hold“ approach is likely to become a thing of the past, and investors will have to focus on opportunities. We believe that Asian high yield bonds –especially the Chinese market – currently offer such an opportunity. We also identify potential in subordinated bonds, but remain underweight in government and inflation-linked bonds.

Gold in the portfolio context

On an absolute basis, investing in gold proved to be a disappointment in 2021. The return was -3.5% in US dollars, close to zero in Swiss francs, and +3.5% in euros. In contrast, the global equity index MSCI World gained nearly 20%. However, the precious metal must be considered in a portfolio context, where it serves as protection in uncertain times. Moreover, due to its physical scarcity, it cannot be easily manipulated by central banks. Therefore, gold should continue to be a cornerstone in any client portfolio in 2022.

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Imprint
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Author: Thomas Wille, Head Research & Strategy, Email: thomas.wille@lgt.com
Editor: Alessandro Fezzi, E-Mail: alessandro.fezzi@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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