Unprecedented pandemic stimulus gives way to the normal business cycle; inflation, supply chain, and labor market pressures noted in report
December 3, 2021
MINNEAPOLIS, MINNESOTA, December 3, 2021 – After almost two years of the pandemic, U.S. and global economies should deliver above-trend growth once again in 2022, but at a less robust and bumpier pace than 2021, RBC Wealth Management – U.S. predicts in its Global Insight 2022 Outlook. The report notes that as unprecedented pandemic stimulus begins to recede, the normal progression of the business cycle will take its place and provide continued support for equities to deliver positive returns.
Kelly Bogdanova, vice president and portfolio analyst at RBC Wealth Management – U.S., said, “Heading into 2022, the initial catch-up phase of the global economic recovery after the pandemic is giving way to a more normal expansion phase. This should be good for equities for as long as U.S. and global recessions can be avoided. We think equities will be the asset class of choice once again in 2022.”
The report concludes there is no U.S. recession in sight, with all six of the firm’s leading indicators of a recession not prominent factors at the moment. Credit conditions are easy, excess savings and pent-up demand are fueling consumer spending and capital spending is surging, to name a few. The report recognizes the impact of low inventories because of shipping/supply chain disruptions but affirms restocking should provide support to industrial production and GDP growth for at least the next year.
While inflation has risen in late 2021, RBC Wealth Management expects it to ebb toward the second half of 2022 and recede further in 2023 with artificial shortages correcting, the return of more people to the workforce and the capital spending boom. Should this materialize, the Fed and other central banks should be able to eventually end their rate hike cycles before credit conditions pass the point of no return for the economy. The report explains that current economic tailwinds are reasons to expect above-trend GDP growth through 2022 and probably 2023 as well, which should support further corporate profit growth. The report states it would be unusual for share prices not to maintain an upward trend for at least another 12–18 months in that case.
After 2023, as the business cycle matures, expected growth of the labor force and increases in productivity would point to an extended period of slow GDP growth, which, in turn, could mean a period of intense corporate competition and greater corporate concentration. The report states that equities can be rewarding in this environment, as long as portfolios include the beneficiaries of corporate concentration. Avoiding investments in those companies that are challenged in such an environment would be just as important.
The report also addresses the corporate bond market in light of the record level of debt issuance and loans in 2020 during the height of the pandemic. The first three quarters of 2021 saw an additional $1.56 trillion brought into the debt market, with the nonfinancial corporate debt and loan market now standing at approximately $11 trillion, according to Federal Reserve data.
Tom Garretson, fixed income senior portfolio strategist at RBC Wealth Management – U.S., said, “Although corporate debt levels have risen, they can’t be looked at in isolation—it’s all relative. Debt levels haven’t strayed too far from long-term trends relative to GDP. Debt is up, but liquidity is improved with record cash on balance sheets, and interest costs are down. Companies could emerge from the pandemic in far better financial positions despite rising debt loads.”
Credit spreads remain at historic lows, with the Bloomberg index of investment-grade corporate bonds now yielding just 0.85 percent over Treasuries, well below the decade average of 1.3 percent. Should Treasury yields rise, as is broadly expected over the next couple of years based on Bloomberg consensus forecasts, investment-grade bond prices could fall modestly as bond yields and prices move inversely.
“Investors should consider exposing their portfolios to both corporate and Treasury bonds in a balanced, diversified portfolio. Risk exposures for each are quite different with investment-grade corporate bond yields tracking movements of Treasury yields,” Garretson added.
The report spotlights a long-term investment theme: the energy transformation. As the global push toward carbon reduction and green energy transformation should continue to provide opportunities, investors need to maintain a pragmatic approach given the gaps between ambitions and potential outcomes. Some experts believe that meeting clean energy goals will require the largest peacetime industrial mobilization, as international agreements seek to lower global carbon emissions 30 percent by 2032 and approach net-zero emissions by 2050 for most countries.
Reaching such goals could require an economic realignment rivaling the industrial revolution in the late 1800s and technological revolution in the latter stages of the 20th century. With such drastic infrastructure requirements and the need to support an ever more digitized economy, reaching net-zero emissions by 2050 could require well over $100 trillion in new capital on a global level, likely creating significant opportunities.
But where there are opportunities, there are also realities and challenges associated with getting from the fossil fuel-based energy system of today to a cleaner, advanced low-carbon energy system of tomorrow.
Bogdanova said, “We encourage investors to focus on the green energy opportunities that are likely to find their way to market in the next five to ten years and are not as dependent on substantial, coordinated long-term government subsidies or private sector investments that have yet to be designated, allocated or may not fully pan out.”
China’s economic path is another factor the report suggests long-term investors should consider. Over the past four decades, China has made the greatest contribution to global GDP growth, becoming the world’s second-largest economy as well as the largest consumer of most industrial commodities. Despite this, a decline in the working-age population and a decrease in productivity growth have contributed to China’s GDP growth slowing by two-thirds since its peak prior to the financial crisis and could slow China’s economy in the near future.
As Chinese President Xi Jinping seeks to implement a more inward-looking policy mix in order to foster a broader, more balanced domestic economy and build on China’s competitive edge in the international arena, developments in China are likely to have economic consequences beyond its borders.
Multiple factors will have important ramifications for those trying to do business in China, as well as for those competing with Chinese firms in the global marketplace. They include the prospect of a further persistent slowdown in China’s GDP growth into the 3%-4% range; the shift in policy emphasis away from infrastructure spending toward productivity-enhancing, technology-driven investment; the drive to promote renewable energy development as a way to achieve internal carbon-reduction goals and reduce dependence on foreign energy imports; and the crackdown on unconstrained capitalism and conspicuous wealth in favor of broader gains for the average citizen.
In addition to these insights summarized above, the Global Insight 2022 Outlook also presents RBC Wealth Management’s house position for regional equity and fixed income markets, as well as currencies and commodities markets. Those views can be found here.
All opinions and estimates constitute the author’s judgment as of the date of this publication, are subject to change without notice and are provided in good faith but without legal responsibility. This material has been prepared without regard to the individual financial circumstances and objectives of persons who receive it.
In the United States, RBC Wealth Management operates as a division of RBC Capital Markets, LLC. Founded in 1909, RBC Wealth Management is a member of the New York Stock Exchange, the Financial Industry Regulatory Authority, the Securities Investor Protection Corporation, and other major securities exchanges. RBC Wealth Management has $542 billion in total client assets with more than 2,100 financial advisors operating in 182 locations in 42 states.
Jenny Paffel, RBC Wealth Management, 612-371-2239, jenny.paffel@rbc.com.
Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.