Capital markets in search of a new post-pandemic equilibrium


An article by Jens Wilhelm

Member of the Board of Managing Directors of Union Investment responsible for portfolio management and real estate

  • Global economy continues to grow, albeit at a slower rate

  • Impact of the coronavirus crisis on stock markets is waning

  • Inflation will start to settle at an elevated level

  • Equities and commodities look attractive

  • Moderate rise in yields on government bonds

  • Transition to a green economy opens up new investment opportunities

The outlook for investors remains positive in 2022. Jens Wilhelm, member of the Board of Managing Directors of Union Investment responsible for portfolio management and real estate, therefore believes that risk assets such as equities offer further upside potential. “2022 will be a year of normalisation, in terms of the pandemic, the economy and monetary policy,” he predicts. At the same time, Wilhelm anticipates heightened volatility as the capital markets seek to find a new equilibrium in the aftermath of the pandemic. He believes that a very active approach and careful security selection will be the best strategy.

The pandemic situation is looking fundamentally different to that seen in the last couple of years – even though a tough winter lies ahead. “We are slowly approaching the point where we shift from a pandemic to a situation where the virus is an endemic disease that can be treated effectively with vaccines and medications,” says Wilhelm, pointing to rising vaccination rates and immunisation levels in most parts of the world. He does not anticipate further major waves of infection in 2022. “The influence of infection levels on the capital markets is weakening,” he concludes.

New phase: Waning impact of pandemic on capital markets

End of the pandemic in sight

New phase: Waning impact of pandemic on capital markets
Sources: Our World in Data, Union Investment, as at 15 November 2021. * Germany, France, Italy, Spain.

With regard to the economy, Wilhelm believes that the strong recovery in 2021 will be followed by a normalisation of conditions in the new year: “We expect a slightly slower but still adequate rate of growth.” Union Investment’s economists predict that global gross domestic product (GDP) will go up by a solid 4.5 per cent in 2022, compared with 5.7 per cent in 2021. For the USA, they forecast a growth rate of 5.5 per cent in 2021, contracting to 4.2 per cent in 2021, and for the eurozone, growth of 5.1 per cent in 2021, contracting to 4.5 per cent in 2022. Wilhelm also expects economic growth in China to weaken. He believes that the government in Beijing is consciously tolerating a degree of decline under its ‘common prosperity’ strategy in order to achieve objectives such as reducing inequality and cooling down the property market. “The new economic policy approach of China’s Communist Party will dampen growth but does not pose a systemic threat for the markets,” concludes Wilhelm. He anticipates that GDP growth in China will slow down from 8.0 per cent in 2021 to 5.0 per cent in 2022.

Germany’s GDP set to surge

Wilhelm believes that the German economy will be the exception to the rule. He points out that “Germany has been affected particularly badly by current supply chain disruptions because of the huge role that the manufacturing sector plays in its economy”. But he expects that these bottlenecks will be resolved in 2022 and that economic growth will pick up strongly as a result: “Our forecasts predict that Germany’s GDP will surge by 4.3 per cent in 2022.” The German economy thus provides a perfect illustration of how the current supply chain disruptions affect economic growth. In the short term, they cause a slowdown because industrial production has to be postponed. “But this postponement essentially means that the ‘missed growth’ is kept in the bank for a future date when companies are able to catch up with the backlog,” explains Wilhelm.

Inflation starting to settle at an elevated level

The growth trend will also play a part in calming down inflation in 2022. “The era of disinflation is coming to an end, but we are not expecting high inflation to be a persistent phenomenon either,” Wilhelm concludes. In the first half of the year, energy prices will probably still prevent inflationary pressure from easing significantly. But gradually, the low base effects will cease to apply and the focus of consumption will shift from goods to services, meaning that the rate at which prices go up should slow from the very rapid increases we are currently experiencing to a much more moderate rate in most cases in the second half of the 2022. Wilhelm expects that inflation will eventually stabilise, albeit at a higher level than before the coronavirus crisis. “More specifically, we anticipate inflation of 3.7 per cent in the US and 2.4 per cent in the eurozone in 2022,” he predicts.

Monetary policy tightening but not to market’s detriment

The monetary policy cycle has turned

Monetary policy tightening but not to market’s detriment
Sources: Bloomberg, Union Investment, as at 15 November 2021.

Normalisation of monetary policy has already started

Against this backdrop, many smaller central banks in Europe and Asia have already started to scale back their monetary policy support. “The global monetary policy cycle has turned,” explains Wilhelm. The US Federal Reserve (Fed) will be the first heavyweight to take steps to normalise its monetary policy. “By the middle of 2022, the Fed will most likely have reduced its bond purchases to zero. This means that we will probably see a first interest-rate hike in the US at the end of next year,” he sums up Union Investment’s expectations. The European Central Bank (ECB) is likely to take a much more cautious approach. “We believe that the ECB will start to taper its bond purchases in 2022, but not to zero. It will continue to purchase assets beyond the end of its pandemic emergency purchase programme – probably even until the end of 2023,” says Wilhelm. All in all, he takes the view that the normalisation of monetary policy has already begun and that central bank support for the stock markets will weaken in the coming year.

Equities and commodities look attractive

Although the capital markets will clearly present a more challenging environment as they find a new equilibrium in the post-pandemic world, there will still be opportunities. “In the year ahead, ample growth in the economy should eclipse concerns about inflation and tighter monetary policy. The outlook for high-reward investments remains strong as a result,” says Wilhelm, who believes that equities continue to offer the best prospects for investors. He adds: “Although this upside potential will be limited because of the valuations that have been reached, equities still look attractively priced compared with other asset classes, not least because corporate profits remain on an upward trajectory.” Union Investment estimates that the earnings of major companies will go up by 8 per cent globally in 2022. “Corporate profits provide a solid buffer, even in the event that stock valuations fall slightly, enabling an attractive total return after taking dividends and share buybacks into consideration,” Wilhelm says.

He believes that commodities are also likely to perform well in 2022. However, a longer-term shift in favourites is emerging here. “Not all of yesterday’s champions will be tomorrow’s winners,” is his prediction. This is mainly due to global decarbonisation plans, as recently discussed at the COP26 climate change conference. “The commodities that the world needs in order to transition to a green economy will continue to be in high demand,” he expects. Then there is the anticipated resolution of supply chain issues. Both these factors point to a double-digit percentage increase in the price of industrial metals over the course of the year. For energy commodities, however, the rising demand appears to be priced in already.

Moderate rise in yields on government bonds

On the fixed income side, Wilhelm expects yields on safe havens to rise slightly as monetary policy normalises and inflation edges up. “A realistic prospect for the end of 2022 are yields of 2.0 per cent on ten-year US Treasuries and of 0.2 per cent on German Bunds of the same maturity.” Wilhelm believes that larger increases are unlikely, as the net supply of outstanding US government bonds will probably either hardly change at all or even fall, as in the eurozone. The end result is that he anticipates there being a cap on the supply of bonds available to investors, which should serve to stabilise yields. In the case of corporate bonds, for so long a fallback strategy favoured by investors on the hunt for returns, Wilhelm sees only limited potential. “Spreads on corporate bonds are unlikely to narrow further, particularly as the ‘put’ effect of the ECB’s bond purchases starts to weaken in Europe,” he says. This means that despite its good fundamentals, the sub-asset class is no longer among the favourites for 2022, even though there undoubtedly will be opportunities in certain segments such as subordinated bonds and CoCo bonds.

The signs in the real estate sector are, for Wilhelm, pointing to normalisation. “The investment markets for real estate are stable and now the rental market is improving as well,” he says. This trend is most apparent in segments that have had a particularly tough time because of the pandemic, such as hotels. Wilhelm adds: “The more normal economic life becomes next year, the faster real estate markets will be able to heal. “The asset class will thus play an important role for investors as the economy finds a post-pandemic equilibrium that continues to be characterised by low interest rates.

Conditions for bond investors are becoming more challenging

Yield curves are shifting

Conditions for bond investors are becoming more challenging
Source: Bloomberg, as at 15 November 2021.

Transition to a green economy opens up new investment opportunities

After two highly unusual years, 2022 will mark the transition to a more normal dynamic in the capital markets. However, investors should not take this as an invitation to sit back and relax. Quite the opposite, as Wilhelm warns: “The strong tailwind for the capital markets is weakening. And the differences in how the individual asset classes perform are narrowing.” Nevertheless, he also sees new investment opportunities arising as a result of structural change, particularly where the transition to a green economy is concerned: “The use of sustainable investment criteria is becoming increasingly important in light of this massive transformation. Decarbonisation is the key term here. Success in the stock markets in 2022 will, on the whole, be contingent more on whether the right stocks and the right sectors are picked and to tactical activity.” In any case, the growth outlook remains positive and this means there is a good chance of achieving this success as the markets find a new post-pandemic equilibrium.


As at 24 November 2021

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