2022 Investment Outlook: Assessing the path ahead

2022 Investment Outlook: Assessing the path ahead
Key takeaways
2020 and 2021 saw dramatic monetary and fiscal policy moves
2022 looks to be a year of transition as policies and economies move toward a more normal state.
Inflation will likely define the economic and market environment next year
Continued supply-chain disruptions and an upsurge in demand are threatening to keep inflation high across many economies.
Our base case foresees normalizing global growth, remaining above its long-term trend but decelerating to a more sustainable rate
We also share tail risk scenarios for transitory and persistent inflation risk, and the investment implications of each.

It’s that time of year again, when we release our investment outlook for the coming year. As always, this has been a collaborative effort, reflecting the views of many investment professionals and thought leaders at Invesco. We have provided a base case scenario, which we believe is very likely, along with the potential investment implications of that scenario. In addition, we have once again provided two tail risk scenarios, which we believe are less likely but nevertheless important to contemplate. We also explore the potential investment implications of those tail risk scenarios.

Setting the stage

2020 and 2021 saw dramatic monetary and fiscal policy moves. Now the stage is set for 2022 to be a year of transition as policies and economies move toward a more normal state. However, issues remain that will likely define the economic and market environment, including continued supply-chain disruptions and an upsurge in demand that threaten to keep inflation high across many economies. For 2022, our outlook is centered on the question of inflation and how markets and policymakers may react to it.

Our base case

We expect global growth to normalize, remaining above its long-term trend but decelerating to a more sustainable rate as fiscal stimulus is gradually removed. We anticipate that inflation will peak in mid-2022 and then start to slowly moderate, backing down toward target rates by the end of 2023 as supply-chain issues resolve, vaccination levels increase, and more employees return to the workforce. We still believe the Federal Reserve (Fed) will be patiently accommodative, with a rate lift-off in the back half of 2022, although other developed countries’ central banks might act more quickly. Finally, we expect volatility will increase as markets digest the transition to slower growth and a gradual tightening in monetary policy.

From a relative asset allocation perspective, our base case expectations lead us to a reduced risk posture, with a slight overweighting of equities tilted toward defensive sectors such as information technology, communication services, health care, real estate and consumer staples. We prefer quality and large caps in this scenario, given slowing growth expectations and stable (or lower) long-term bond yields. We also anticipate that alternatives such as real estate and private credit, as well as commodities, would outperform in this environment. For regional allocations, our base case indicates a preference for emerging markets (including EM currencies) due to cyclical divergence and US equities over other developed markets as the global slowdown favors regions with lower cyclical exposure and lower operating leverage.

Transitory inflation risk

In our transitory inflation risk scenario, current inflation fears prove to be overblown, with inflation gradually coming off its current highs toward something close to or below 2%. We see higher than normal growth in this environment, ultimately pointing to economies being earlier in the cycle than we currently judge them. In this scenario, our favored asset classes would include equities (particularly industrials, materials, energy, and financials) as well as high yield and investment grade fixed income; regionally we would prefer the US (and the US dollar) and developed ex-US markets.

Persistent inflationary risk

In our persistent inflationary risk scenario, developed central banks’ messaging fails to convince markets that inflation is transitory, with further elevated prints throughout 2022. We see the problem as stemming from a combination of elevated demand driven by past monetary expansion and supply-side disruptions. This causes inflation expectations to become unanchored, with medium-term expectations rising above the 4% mark persistently. This would signal a loss of credibility for those central banks, requiring action that prompts a significant risk of ending the current economic cycle. In this downside scenario, we would look for gold, ex-US developed market sovereigns (hedged), and inflation-protected bonds to outperform. Within equities we would prefer defensives, communications, large caps, and quality issuers. Regionally we would favor Australia, Canada, and Japan.

The path ahead

We recognize that we have formed these views largely prior to the emergence of the Omicron variant and the possibility of an accelerated taper timeline from the Fed. These events at present do not alter our views in a meaningful way. Indeed, the potential for an earlier move from the Fed is a marginal event, and the Omicron variant introduces uncertainty but has not yielded a Draconian shutdown in economic activity. Omicron may prolong the recovery in tourism and some services sectors, but we do not foresee a return to harsh early-pandemic measures to manage the virus. As we have said so many times throughout this pandemic, the risks are elevated but we remain optimistic about the path forward.

With contributions from Ashley Oerth.

Related insights

success failure

Keep up-to-date

Sign up to receive the latest insights from Invesco’s global team of experts and details about on demand and upcoming online events. 

Keep up-to-date

When you interact with us, we may collect information about you which constitutes personal data under applicable laws and regulations. Our privacy notice explains how we use and protect your personal data.

If your interests change, you can update your preferences at any time.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Like what you see?
Hear first about events and get insights from our global network of investment and policy experts
Sign Up

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Important information

  • The opinions referenced above are those of the author as of  06 December 2021.

    This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

    Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.

    The consumer price index (CPI) measures change in consumer prices as determined by the US Bureau of Labor Statistics. Core CPI excludes food and energy prices.

    The breakeven inflation rate is the difference between the yield of a nominal bond and the yield of an inflation-linked bond of the same maturity. It represents the market’s expectations for inflation.

    Diversification does not guarantee a profit or eliminate the risk of loss.

    In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

    Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors and the amount of any dividend may vary over time.

    Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments. 

    Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.