Perspective

Outlook 2022 – Forging Ahead…


Alain E. Roch, MBA

President and CEO

Alain.Roch@bluebridge.caDrum roll please: 2021 has been a fantastic year for the stock markets. Not even the draconian pandemic management measures, including curfews, restrictions, telework and business closures, have dampened the stock market. If you take indicators from around the world at face value, the economy is doing quite well. An impressive recovery is unfolding as companies reap unexpected profits. The United States is already back to its pre-pandemic GDP levels. Growth in both Europe and Canada in 2022 is expected to exceed 4%. Some consider this performance outstanding, record-breaking even, but is it realistic?

We can see it in our everyday lives: many sectors of the economy have been hard hit by the raging pandemic. Tourism, transportation, recreation, restaurants and more are on life support. Raw materials are in short supply and the workforce has vanished. Inflation is already running amok as our grocery carts remind us.

The Omicron variant is certainly more contagious, but is it less dangerous? Less dangerous to our health, maybe, but what about the economy? Global growth will slow in 2022 and the World Bank has warned that a worst-case scenario under the effects of Omicron is not impossible. The institution dropped its global GDP growth forecast for 2022 to 3.9% or even 3.4%. “Covid-19 continues to take its toll, especially on the populations of poor countries,” lamented its President, David Malpass, during a recent conference call, noting the “troubling reversal” in poverty reduction, improved nutrition and health. “I’m very concerned about the permanent developmental scar that the pandemic will leave behind,” he added. If the variant were to become a lasting phenomenon, with the number of infections remaining high and putting pressure on health-care systems, growth could be even lower. In such a scenario, labour shortages would increase, further disrupting global supply chains and fuelling inflation. Confronted with runaway inflation, the U.S. central bank (Fed) could raise rates drastically, making it more expensive to borrow. In this worst-case scenario, the shock would be felt primarily in the first quarter of 2022, likely followed by a significant rebound in the second quarter, as we come to terms with the possibility of yet another variant.

In these circumstances, how should we invest in 2022?

  • Stay in cash? This “strategy” guarantees a 4-5% loss to inflation.
  • Strengthen our portfolio diversification.
  • Buy equities rather than bonds and be selective about credit. In fact, equities seem a better bet than bonds to withstand a surge in inflation and a rise in interest rates.
  • Adjust exposure in favour of segments most capable of riding the wave of cyclical recovery and better sheltered from inflationary pressures.
  • Encourage alternative investments: real, tangible investments like real estate, farmland, buildable land, forest, etc., an essential source of diversification. Furthermore, keep in mind that infrastructure-related assets are the current focus of massive government spending.

 

A word to the wise. Cheers!

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By ALAIN E. ROCH, MBA

24/01/2022

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