With 2021 about to hit the rear-view mirror, global investment firm Capital Group yesterday offered a 2022 outlook that holds some bright spots even with the threat of rate hikes and the uncertainty of the bull market.
Rob Lovelace, the company's vice chairman and president, and Mike Gitlin, head of fixed income, shared their perspectives in a scheduled webinar th day after news broke of the Federal Reserve’s plans to raise interest rates three times next year, perhaps beginning as early as March, when it ends tapering.
Lovelace set the tone for the event by speaking to three primary influences on performance that remain intertwined: the pandemic, the economy and the markets.
According to Lovelace, the impact of the pandemic has now been regionalized and will have a diminishing impact on the economy over time. And in turn, the economy will a minimal impact on markets overall. “So if each of those links is getting weaker—some people are wondering why is it, if we’re having another lockdown, the markets aren’t responding—over time what we’re expecting to see is continuation of this pattern but diminishing impact on the economy and diminishing impact on the markets.”
Looking at the last 11 years of S&P 500 performance, Lovelace said that even with the Covid-19 correction in 2019, the markets have not only bounced back, they’ve continued with what is an extension of a decade or longer bull market. “In the U.S. in particular, what we’ve seen is a longer event that had an interruption because of Covid, but it didn’t change the fundamental direction of where markets are going,” he said. “Now with this 10-year period, we’re definitely seeing excesses in the market, and usually those excesses are the things that we need to see a correction to clean out.”
Gitlin agreed that increased volatility is on the horizon as the Fed enacts those rate bumps. And since the bumps will be gradual, Gitlin said he expected inflation will become “slowflation,” which he defined as economic growth that remains positive even as it slows, and it slows while inflation is persistently high.
“If we go a few years forward, I think you’ll see something maybe we’ll try to coin ‘the old normal’ in that you’ll see normalization of growth, maybe around 2% to 3%, you’ll see normalization of wages with people going back to the job market, you’ll see normalization of rent, which is a huge component of CPI, normalization of inflation a few years out (but not 2022), and then normalization of supply chains,” he said. “That will be welcomed by everyone, I’m sure.”
With that overall outlook, Lovelace and Gitlin picked their favorite investment options for 2022, which included U.S. equities for their price-to-earnings ratio and equities in China, specifically in pharmaceuticals, as well as careful security selection and sector rotation on the fixed income side.
“In terms of different sectors, we always say high-yield corporates don’t need a raging economy, they just can’t withstand a recession in terms of how they perform,” Gitlin said. “So high-yield corporates in an economy that’s slowing from a very high growth rate but still positive can do well. There’s low default rates and low expected default rates. High yield is really a short-duration asset class, so not really a ton of interest rate risk. And credit quality in high yield, with double-Bs being historically high, it’s an interesting place to invest.”
Gitlin said he’s pegging his fixed-income allocation at one half core bonds, and the other half split between core strategies and multisector income.