Investment Update January 2022

Slower but sure growth ahead

Global equity markets continued to rise in December. They were up nearly 4% in EUR to end 2021 with an impressive performance of 31% for the year in developed markets and 27% including emerging markets.

Developed markets were the top performers last month: Europe led the way (+5,5%) followed by North America (+3%). Emerging markets remained flat and ended the year well behind western markets.

Bond yields moved higher, with US 10-year yields rising from 1,45% to 1,51% and German 10-year yields moving from -0,35% to -0,18%.

On the commodities side, oil made a comeback after a tough November. Oil prices returned to their November levels, rising from USD 65 to USD 80 per barrel in a market environment where the more cyclical sectors delivered impressive performances relative to growth sectors.

Central banks around the world held meetings in December and made moves to tighten their monetary policy. While the US Federal Reserve (Fed) said it intends to raise rates and taper its asset purchases, the Bank of England has already taken the plunge and increased its key rates. The European Central Bank (ECB) is preparing to end its exceptional pandemic support programme but is not planning to raise its rates.

In anticipation of these monetary tightenings, almost all emerging country central banks also raised their key rates.

December’s economic indicators confirmed the economic picture that has been painted for several months.

Economic activity is strong, demand is robust, unemployment is falling, wages are climbing, and confidence indicators are positive overall.

That said, inflation is still top of mind for many people. This is reflected in December’s inflation figures. These hit record levels and were confirmed by the messages out of the central banks, which warned that inflation could persist in 2022.

The second major event in December was the spread of the COVID‑19 Omicron variant, which sowed doubt for a time on the markets. Just a few days after it was discovered, the health authorities confirmed that, despite its high spread, Omicron was a more benign variant than Delta.

In short, the most rapid phase of economic growth is now behind us. Growth rates were at an all-time high in 2021 after the recession in 2020. Growth should remain above the long-term trend in 2022, but is naturally expected to be weaker than in 2021.

The equity markets were thus driven by a very strong economy and an annual performance of about 30%.

With economic growth set to enter its normalisation phase and valuations at high levels, expectations for the equity markets are on the rise but should be moderated.

Against this backdrop, most market analysts agree that we can expect a positive but modest performance on the equity side (<10%), while bonds could take a hit in a rising rate environment.

We therefore maintain our preference for equities over bonds and remain positive on developed markets versus emerging markets. From a sector standpoint, we maintain a balance between cyclical sectors that benefit from higher rates and high demand, on the one hand, and long-term trends, on the other. On the fixed-income side, we continue to believe that it is better to maintain a shorter duration than the market, given the inflationary environment and monetary tightening. At the same time, we think it makes sense to keep some cash in a diversified portfolio, to be able to take advantage of attractive entry points in the hunt for yield on the bond market. The monetary tightening we will see in 2022 could lead to some volatility, which has the potential to be profitable.

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