“Our view is that 2022 will be the year of a full global recovery, an end of the pandemic and a return to normal economic and market conditions we had prior to the COVID-19 outbreak,” JPMorgan’s Marko Kolanovic wrote, in the introduction to the bank’s global markets outlook for the year ahead.
Although 2021 was a good year for many equity benchmarks (particularly US indices), it was perilous and, at times, maddening, for active managers. Kolanovic revisited the trials and tribulations of anyone inclined (or obliged) to generate alpha or otherwise invest strategically and opportunistically.
Despite the “strong tailwind” from the global recovery and generally “positive tone” for risk assets, “performance of various investment strategies was often thrown off by new COVID-19 waves leading to market volatility, steepening/flattening of yield curves and style rotations,” Marko wrote.
That’s putting it nicely. Thematic swings and factor reversals became more norm than exception. Early in 2021, some worried fiscal largesse would catalyze a disorderly bear steepener. And the short-end came alive in October, when central banks looked poised to turn full-on hawkish in the face of rising inflation. That was followed almost immediately by policy error fears in November. Ultimately, the nominal curve was a temperamental, mercurial beast in 2021. That played havoc beneath the surface in equities.
“Confusion about monetary policy liftoff injected new volatility and pain into various active portfolios,” Kolanovic wrote, recapping October and early November. “Markets regained their footing, only to be put in another tailspin by the Omicron variant scare, that caused a spike in equity and bond volatility.”
Uncertainty around monetary policy will linger for the foreseeable future, and while equity volatility has receded (figure above), the prospect of higher real rates and tighter policy casts a pall, especially considering elevated valuations.
Given that, what informs Kolanovic’s upbeat view on 2022? Well, first, JPMorgan’s strategists expect a combination of “broad population immunity” and “human ingenuity” to help end the pandemic. Kolanovic cited “new therapeutics expected to be broadly available” next year.
The result will be a robust cyclical recovery and a normalization in mobility in economies across the globe. That, in turn, presages “a release of pent-up demand” both from consumers and corporates, JPMorgan said.
Consumers are still sitting on trillions in “excess” savings, according to the standard narrative, while the C-suite needs to replenish inventories and execute authorized buybacks.
Kolanovic emphasized that increased demand in 2022 will play out against “a backdrop of still-easy monetary policy.” Rates, although off the lower-bound, will still basically be zero. The flow of QE will recede, but reinvestments will continue. In short, policy won’t be anywhere near restrictive and central banks will still be buying assets.
All of that said, Kolanovic reiterated a cautious outlook on pandemic beneficiaries, bond proxies and various manifestations of “froth.”
“Increases in bond yields, inflation and reopening should also set back parts of the market that benefited from extreme monetary accommodation and COVID-19, and whose valuations are at unsustainable speculative levels,” he said, citing low volatility strategies, EVs, digital assets, richly-valued growth stocks and “parts of ESG.”
Although JPMorgan’s 2022 target for the S&P is “just” 5,050 (I say “just” because there are already higher targets out there), Kolanovic said international equities, emerging markets and cyclicals could “deliver 2-3 times higher returns.”
10-year US yields will end the year at 2.25%, the bank projected.
What about risks? First, Marko conceded that markets may not digest tighter monetary policy with alacrity. Tightening “will likely inject volatility,” he said.
In addition, he flagged Ukraine and Iran as risks that need “monitoring” and again warned on “a looming energy crisis.”
Regardless of risks, Kolanovic said JPMorgan’s global research team “believe[s] that 2022 will be a strong year for economic recovery and performance of cyclical assets.”
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