Investors can maintain a broadly optimistic outlook for 2022, but in its Market Outlook report, ANZ warns that further double-digit returns in equity, as was seen in 2021, would be unlikely.
“Rather, 2022 commences with a mild overweight to risk assets based on cautious optimism and a belief that, despite more moderate returns, equities should continue to outperform bonds and cash — albeit against a backdrop of heightened volatility,” ANZ Head of Investment Strategy Lakshman Anantakrishnan said.
During a year of uncertainty and lockdowns, the global equity markets jumped 20.7 percent in 2021, following a 14 percent lift the previous year, according to MSCI World Index.
“These gains were supported by incredibly strong earnings growth and the continuation of unconventional monetary policy and fiscal tools usually reserved for wartime,” Anantakrishnan said.
Despite the overall optimistic outlook for 2022, share markets around the world have tumbled since the start of the year.
Shane Oliver, the head of investment strategy for AMP Capital, noted that periodic market corrections of up to 20 percent are “healthy and normal.”
“While share market pullbacks can be painful, they are healthy as they help limit complacency and excessive risk-taking,” Oliver said.
He also recommended that investors “turn down the noise” of negative news coverage that often reports on crashes in the share market.
“But such headlines are often just a distortion. We are never told of the billions that market rebounds and the rising long-term trend in share prices adds to the share market,” Oliver said.
Inflationary pressures developing around the world have stymied sustained extreme expansionary monetary policy, signalling the raising of official interest rates by many central banks around the world.
The Bank of England and Reserve Bank of New Zealand have already begun lifting rates, while the United States Federal Reserve has also indicated its plans to begin hiking rates in March.
“Inflationary pressures, and more precisely the reaction function of central banks, will perhaps be most telling for asset prices this year,” Anantakrishnan said.
In Australia, the removal of border restrictions, high vaccination rates, high levels of household savings, and pent-up demand is expected to support high economic growth.
On the back of these factors, both ANZ Bank and Commonwealth Bank are expecting the national economy to grow 5.1 percent—the most substantial annual growth since the late-1980s. Westpac Bank is forecasting a stronger annual growth of 5.5 percent.
ANZ believes that current risks will push the economy to an earlier interest rate cycle. Upside risks include actual spending to outperform already strong forecasts, an earlier tightening of the labour market, or a faster than expected accelerating in wage growth.
Downside risks revolve around the COVID-19 pandemic, such as more variants, outbreaks, and lockdowns.
Domestically, inflation is trailing behind other major economies leading to the Reserve Bank of Australia (RBA) reiterating its patience in raising the cash rate.
However, with the latest inflation figures far outpacing RBA forecasts, economists are expecting the RBA to change its forward guidance soon.
The RBA board will have its first monetary meeting of the year on Feb. 1.