Forced, planned and unexpected transformation
In the year 2022 and beyond, we believe that the global economy and global markets will undergo forced, planned, and unexpected transformations on a scale unlike anything witnessed in recent history. Only select economies will be able to quickly adapt, innovate and thrive, experiencing broad, overall growth.
The change and transformation in motion will remain in play for the foreseeable future. Formidable forces are driving this transformation, creating tremendous disruption, divergence, and divisions in an age of debt levels at historic proportions in nearly all emerging and advanced economies.
While pandemics and crises pose significant threats, they also trigger great innovation, adaptation and thus positively transform our world. However, not all governments and organizations are able to adapt, innovate, and change fast enough.
Widespread divergence and disruption across economies and industries is a by-product during periods of transformation. Organic growth will surface more readily in countries with the most business-friendly and adaptive environment, especially those primarily driven by domestic consumption. At the same time, new alliances will forge stronger trade relationships or fortify old trade routes. Quality countries and companies that can adapt and innovate will thrive.
Investment strategies and portfolios must be constructed or adjusted accordingly. Indeed, portfolio managers will need to adopt a more active portfolio management style for the year ahead.
Why we’re “risk-on”
We remain “risk-on” — searching for return, willing to take risks due to three critical supporting variables: Growth, policy support and negative real yields.
- Growth — Key advanced economies (US and EU) will continue to grow, albeit slower than the post-pandemic bounce, recovery. The US will have more organic, domestic-driven growth, thus our favourite region.
- Policy support — While there are growing risks of tapering monetary policy accommodation in the quarters ahead, it will take place from historic levels of policy support. Therefore, the policy will be moving from ultra-supportive to very supportive.
- Negative real yields — In a world where most of the core government bond real yields are negative, investors will likely continue to allocate to riskier assets with positive real yields; riskier parts of fixed income, and into equities, and other investments.
Overweight equities, primarily US, EU, and Switzerland, favoring cyclical sectors, value, and quality style factors. In hedge funds, we prefer allocation to credit and equity long/short, event-driven, and global macro strategies. We continue to favor distribution to solid and active managers and allocation to structural trends. Lastly, we hold a strong overweight in our gold allocation given our concerns about the geopolitical and inflation outlook and remain positive on the USD outlook.
See our asset class views.
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