2022 outlook: Turning point

After another extraordinary year for investors, expectations are mounting that 2022 will form a turning point for the global economy and markets: in the face of rising inflation, central bankers aim to withdraw the stimulus that has provided an extremely supportive backdrop for risk assets.

While the world is learning to live with COVID-19, flare-ups will likely continue to be disruptive; there is also the potential risk of a vaccine-resistant mutation that could have a more material impact on growth.

Politics adds another layer of uncertainty to the outlook, with midterm elections due to take place in Washington and tensions between the US and its rivals continuing to smoulder. So too do fast-paced technological developments, from the realm of the ‘metaverse’ to that of cryptocurrencies, many of which prompt excitement, bemusement and scepticism from investors and regulators in equal measure.

And yet it is also increasingly clear that the key investment themes accelerated by COVID – such as digitisation and fiscal dominance – are likely to gather pace. Following COP26, we also know that the pandemic has focused the minds of politicians and investors worldwide on the next crucial challenge: climate change and the energy transition.

Recent volatility in energy markets and bond-market gyrations, particularly at the front end of yield curves, underscore how long-term trends can reshape the investment landscape with sometimes astonishing rapidity.

In our 2022 outlook, teams from across LGIM examine what these themes mean for investors next year. Our conclusions include the following key points:

• Inflation risks could trigger an aggressive shift in monetary policy
• The ‘fear of joining in’ – or FOJI – may not be warranted in some growth themes
• Obesity is a financially material issue on which investors should engage

Other topics addressed are how the road to higher rates poses opportunities to forge more resilient portfolios; the outlook for sustainable buildings; and how demand for long-dated, sterling inflation-linked securities is likely to shape up.

Global solutions

Expectations for the role that investors need to play in tackling environmental, social and governance (ESG) issues are also continuing to rise.

As mentioned in our autumn update, we believe climate change is the era-defining challenge we face. It will require us to transform the global energy system, as well as the way we live and consume. Expect profound changes over the coming years that will create both risks and opportunities.

Despite improvements, ESG data remain patchy. We anticipate further advances in the availability and consistency of data along the investment chain, although are pessimistic as to the chances of dramatic progress on carbon pricing in the near term.

But the mixed quality of such data – and uneven market pricing of themes like climate change – enables asset managers to make capital-allocation decisions that can both deliver the positive change the world urgently needs and generate long-term returns for our clients.

This year, we made the point that inaction on climate is simply not an option. In 2022, expect to more hear from us about the nature of the action that is required.

For investors, this means across all investment capabilities, asset classes and regions. The climate emergency is a global problem that requires a truly global solution, in which we can and must play a critical role.

Our 2022 Outlook is available in full here