- 2021 was another challenging and disruptive year for public health and global trade.
- Despite pandemic-driven dislocations, supportive government policies propelled most economies and “risk assets” higher.
- With the potential for recent tailwinds to become headwinds, how should investment portfolios be positioned going forward?
Key themes in 2022
Enduring economic recovery – new Covid variants may be disruptive in the short-term, but society has found ways to adapt to the pandemic and economic growth is expected to remain above trend next year, returning to trend in 2023/4.
Potential disinflationary surprise – as the pandemic recedes, supply chains and labor markets should stabilize, allowing inflation to gradually move back toward the Fed’s 2% target. This should lead the Fed to raise rates more slowly than feared in 2022/3. The Fed’s recent “hawkish” tilt suggests a 0.88% Fed Funds Rate by the end of 2022, still very low historically.
Focus on corporate earnings and equity valuations – through the first half of 2022, higher wages and raw materials along with modestly higher interest rates could start to impact profit margins. However, an improving labor market should also support consumer spending and drive revenue growth.
China’s growth trajectory – China’s ongoing clampdown on industries/sectors not aligned with the government’s “common prosperity” campaign could result in a sharper slowdown than expected. Specifically, the property market downturn and zero Covid tolerance approach have clouded China’s near-term growth outlook. In response, certain restrictive policies have been reversed, demonstrating that China is eager to restore confidence and remain the key driver behind global economic growth.
Ongoing risks – several far-reaching issues are difficult to quantify, including potential cyberattacks, geopolitical shocks (China/Taiwan, Russia/Ukraine, Iran’s nuclear program), monetary policy overtightening, and a possibility of disruption as global economies shift to address climate change.
What are the implications for investment returns?
- Returns over the next 12 months are very difficult to predict with any degree of certainty.
- Over the next 10 years, low yields, moderating growth, and stretched valuations may weigh on overall portfolio returns.
- Inflation could remain elevated in 2022 but is expected to decline and average around 2.4% for the next decade.
- Traditional equities are still expected to generate positive real returns and active management should add value.
- Traditional fixed income still faces headwinds from low/rising rates and could struggle to beat inflation.
- Return potential may be enhanced with allocations to non-traditional asset classes including private debt, private equity, and private real estate.
Given the prospect for lower real returns over the next decade, investors may be inclined to chase recent winners. We believe that maintaining a more strategic approach with a focus on the long-term is likely to keep investors’ expectations and results aligned. We will continue to evaluate opportunities across both traditional and non-traditional assets for client portfolios.
The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm.
This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third party data or the financial information contained herein.
Certain information herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “expect”, “anticipate”, “project”, “estimate”, or any variations thereof. As a result of various uncertainties and actual events, including those discussed herein, actual results or performance of a particular investment strategy may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making investment decisions. ACG has no duty to update or amend such forward-looking statements.
The information presented herein is for informational purposes only and is not intended as an offer to sell or the solicitation of an offer to purchase a security.
Please be aware that there are inherent limitations to all financial models, including Monte Carlo Simulations. Monte Carlo Simulations are a tool used to analyze a range of possible outcomes and assist in making educated asset allocation decisions. Monte Carlo Simulations cannot predict the future or eliminate investment risk. The output of the Monte Carlo Simulation is based on ACG’s capital market assumptions that are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Capital market assumptions based on other models or different estimates may yield different results. ACG expressly disclaims any responsibility for (i) the accuracy of the simulated probability distributions or the assumptions used in deriving the probability distributions, (ii) any errors or omissions in computing or disseminating the probability distributions and (iii) and any reliance on or uses to which the probability distributions are put. The projections or other information generated by ACG regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Judgments and approximations are a necessary and integral part of constructing projected returns. Any estimate of what could have been an investment strategy’s performance is likely to differ from what the strategy would actually have yielded had it been in existence during the relevant period. The source and use of data and the arithmetic operations used for calculating projected returns may be incorrect, inappropriate, flawed or otherwise deficient.
Past performance is not indicative of future results. Given the inherent volatility of the securities markets, you should not assume that your investments will experience returns comparable to those shown in the analysis contained in this report. For example, market and economic conditions may change in the future producing materially different results than those shown included in the analysis contained in this report. Any comparison to an index is for comparative purposes only. An investment cannot be made directly into an index. Indices are unmanaged and do not reflect the deduction of advisory fees.
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Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is an Investment Adviser.