Our thoughts about portfolio positioning for 2022 by asset class and region, and our forecasts for currencies and commodities.
December 1, 2021
The strong initial recovery phase that transpired following the depths of the pandemic has already given way to a more normal yet above-average growth phase. We think this will become more entrenched in 2022. Industries most constrained by COVID-19 headwinds should continue to normalize as long as omicron or some other variant does not result in disruptive lockdowns. An elevated level of infrastructure spending by governments, led by the U.S., should keep fiscal policy relatively accommodative. While China’s ongoing regulatory reform agenda poses risks, we think the Chinese authorities will fine-tune fiscal and monetary policies as needed to support growth. Inflationary pressures, which have spread to all regions, will be one of the key challenges facing major central banks. Following are our thoughts about portfolio positioning for 2022 by asset class and region, and our forecasts for currencies and commodities.
RBC Global Asset Management forecasts the following real GDP growth rates for 2021 and 2022, respectively: U.S., 5.8 percent in 2021 and 3.7 percent in 2022; Canada, 5.3 percent and 3.8 percent; Eurozone, 4.6 percent and 3.7 percent; UK, 6.5 percent and 4.8 percent; Japan, 2.3 percent and 2.4 percent; Developed economies, 5.0 percent and 3.6 percent; Developed economies plus the largest six emerging market economies including China, 6.0 percent and 4.1 percent. For all countries except Japan, 2022 growth is forecast to be lower than 2021 growth (which has yet to be finalized); Japan’s projected growth is barely ahead of 2021.
* Estimates based on purchasing power parity (PPP) calculations; EM-6 represents the six largest emerging market economies, including China.
Source – RBC Global Asset Management; data through 11/19/21
Central banks will aim to right-size policy support in 2022 amid an ongoing economic recovery, and the process of dialing back accommodation will be about finding the right balance. Current market expectations for multiple rate hikes from many major central banks are too aggressive, in our view. We see policymakers continuing to view elevated inflation as temporary, with central banks staying reasonably patient in pursuit of complete economic and labor market recoveries.
Line chart showing year-over-year inflation by quarter from Q4 2020 through Q3 2021 and consensus estimates through Q1 2023, for the U.S., Canada, the UK, and the eurozone. Consensus forecasts call for currently elevated inflation to fade to more normal levels around 2 percent by the end of 2022 for major economies.
Note: Horizontal axis crosses at approximate 2 percent target for most central banks; dashed lines show Bloomberg consensus forecasts as of October 2021 for consumer price indexes.
Source – RBC Wealth Management, Bloomberg
Thomas Garretson, CFA – Minneapolis
Ryan Harder, CFA – Toronto
Rufaro Chiriseri, CFA – London
Calvin Ng – Hong Kong
Chun-Him Tam – Singapore
Our outlook for 2022 features worthwhile global equity returns and moderate earnings growth, supported by above-average GDP growth and strong consumer and business capital spending. Major central banks seem set to begin raising interest rates, yet equity markets typically perform well surrounding the first rate hike. Furthermore, even as rates inch higher, we expect them to remain rather low by historical standards. These factors should make equities the asset class of choice once again in 2022. We recommend holding a moderate Overweight position in equities.
Source – Bloomberg; data as of 11/19/21; represents forward price-to earnings (P/E) ratios based on consensus earnings forecasts for the next 4 quarters (Q4 2021 – Q3 2022)
Kelly Bogdanova – San Francisco
Sunny Singh, CFA – Toronto
Frédérique Carrier – London
Jasmine Duan – Hong Kong
Nicholas Gwee, CFA – Singapore
Nicolas Wong, CFA – Singapore
USD – Fed rate hike expected. The Federal Reserve recently announced plans to begin tapering its asset purchases, a process which if kept at a consistent pace would see quantitative easing end in the summer of 2022. We expect moderate U.S. dollar strength in 2022, with the first interest rate hike currently priced in at the Fed’s July or September policy meeting. Labor market and inflation data will likely dictate the pace at which the Fed adjusts monetary policy going forward.
EUR – ECB to stay dovish. The European Central Bank is expected to replace its current Pandemic Emergency Purchase Programme (PEPP), which is ending in March, with a different form of asset purchases, keeping it amongst the most dovish of central banks. Increasing uncertainty ahead of the French presidential election in April is a potential headwind for the euro.
CAD – Market too hawkish on rate hikes. At its October meeting, a hawkish Bank of Canada (BoC) brought forward the timing of its first potential rate hike from the second half of 2022 to April 2022. While the market has priced in about five rate hikes for 2022, RBC Capital Markets’ economists believe this pace is too aggressive. A dialing back of rate hike expectations could lead to mild loonie weakness in 2022.
GBP – Weaker despite widely expected BoE hikes. A surge in UK inflation could force the Bank of England (BoE) to start raising rates, but similar to the BoC, we think markets have overpriced the extent to which the BoE will tighten in 2022.
JPY – USD/JPY to rally with Fed hikes. With the Fed likely to start to normalize rates in 2022 and the Bank of Japan in no hurry to adjust monetary policy, we believe interest rate differentials between the U.S. and Japan will be the main driver for a higher USD/JPY.
Source – RBC Capital Markets; data through 11/4/21
Richard Tan, CFA – Toronto
Crude oil – Bullish signs. RBC Capital Markets’ oil strategist anticipates WTI prices will remain elevated in 2022 and have further to run driven by the combination of tight supply and strengthening demand. Despite the 57 percent rally year to date, RBC Capital Markets believes oil is in the early stages of a multiyear bull cycle. Furthermore, OPEC+ reiterated its commitment to gradually increase production, which lowers geopolitical risk, in our view.
Natural gas – Multiyear highs. Natural gas prices are trading at multiyear highs driven in part by U.S. production outages, low European stockpiles, and strong liquefied natural gas demand. Furthermore, exploration and production companies have generally committed to capital discipline, which is translating into lower supply growth. Prices are currently trending above RBC Capital Markets’ 2022 high scenario forecast of $4.89/mmBtu.
Copper – Green support. While copper has pared its gains amid slowing Chinese demand, we think the ramp-up in green initiatives should allow copper prices to stay elevated in 2022. RBC Capital Markets expects supply deficits to persist until 2023.
Gold – Downside risks. Gold has been a relative underperformer in 2021 amid the global economic rebound, although prices have stabilized around $1,800 with the help of U.S. dollar weakness and higher inflation. RBC Capital Markets believes further economic momentum and tighter monetary policies expose gold to downside risks in 2022.
Soybeans – Record production. North American production is on pace for a record year as soaring fertilizer prices have incentivized farmers to grow more soybeans relative to corn or wheat. Soybean prices are down approximately 4 percent year to date and will likely require a rebound in Chinese demand before prices can pick up in 2022.
Wheat – Firming support. The U.S. Department of Agriculture is projecting continued strength in international exports, offset slightly by lower domestic consumption. It also anticipates reduced North American production and a drawdown in global inventories. This should provide support for wheat prices.
Source – RBC Capital Markets forecasts for oil, natural gas, copper, and gold), Bloomberg consensus forecasts (soybeans and wheat); data as of 11/19/21
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