Diversification is going to be even more important next year than it is normally—and it already is a top concern for most advisors, according to Jon Maier, chief investment officer for Global X, a New York City-based provider of exchange-traded funds.
The importance of diversification will be enhanced because markets are beginning to adapt to higher yields and to the downward revision of economic growth expectations due to supply chain disruptions and greater inflationary pressures, meaning a wide range of investments will be necessary for successful investing, Maier said in an interview. The worst of the supply chain problems are probably over, but returning to a healthy flow of goods will take time, and that means inflation will remain part of the economy until at least the middle of next year, he said.
“Unfortunately, there are no sectors that are likely to benefit from higher yields but lower economic growth,” he added. But some sectors will fare better than others in the current environment. Financials are usually the biggest beneficiary of higher interest rates, and the same will be true now. As rates trend upwards, banks tend to benefit from higher lending activity and higher interest rates charged to their consumers, he said.
While the supply chain bottlenecks are the main catalyst for higher prices, they are also the most transitory portion of the current inflation. And it’s possible that the U.S. supply chain crunch may have peaked already, Maier said. A major portion of the supply backup, the semiconductor shortage, should improve by mid-2022 as more supply comes online. The shortage affected multiple industries in 2021, everything from automobiles to home appliances, Maier said in a blog post.
Investors looking for income should be prepared for higher rates and inflation to persist, which is a scenario that makes lower duration assets and real assets more attractive, the CIO said. In addition, economic growth is expected to increase, which is important to sectors such as energy, industrials and materials. In addition, information technology, communication services and consumer discretionary sectors will respond well to economic growth expectations.
The Omicron variant could force lockdowns in some places of the world, “but it will not be a game changer in the United States—the impact of the variant already has been reflected in the market rebounds of the last week,” he said. However, “the variant adds a new wrinkle in the fight to control the virus, and it may dominate market sentiment in the near term.”
The markets and the economy for the coming year will be influenced most profoundly by the actions of the Federal Reserve Board. “We believe 2022 is likely to be the ‘Year of the Fed.’ Updated guidance and sentiments from the Fed about inflation expectations, and the speed and trajectories for tapering and interest rate increases, are likely to dominate sentiment in the equities and fixed income markets,” Maier said.
“The Fed has a delicate balancing act to perform,” he explained in the blog post. “Temporary factors are responsible for a substantial portion of the current inflation, and the Fed must look beyond these factors. Moving too early could destroy the economic recovery, yet there are increasingly concerning areas where pricing pressures may be becoming more permanent.
“Equity markets will likely be more selective in 2022 with a focus on valuations, fundamentals, and quality,” he added. “Given the backdrop of rising yields, we currently favor cyclical sectors with above-average purchasing power.”