Here are the biggest downside risks and upside surprises for stocks in 2022

And after the pandemic has now reached its peak, this month’s survey of 106 investors also shows that more market participants expect equity stocks to outperform equities this year on future growth expectations. While the risk remains hidden, more than 40% of respondents chose a more robust economic expansion as the main upside catalyst for 2022.

Katie Koch, Co-Head of Fundamental Equity, said, “We believe 2021 was a year of recovery and 2022 will be a year of resilience – reinventing supply chains, digitizing businesses, innovating in healthcare and more. Investing in building a sustainable planet.” Goldman Sachs Asset Management, which oversees approximately $2 trillion in assets. One of the best opportunities they see is in US small caps, as they “give exposure to the next generation of innovators and disruptors at attractive relative valuations.”

The election results offer a glimpse of some general industry hopes and concerns after this year’s brutal rally, which continued to propel US and European benchmarks to historic highs. The survey was conducted by journalists who reached out to fund managers and strategists at major investment firms from December 3 to 13.

The findings are in line with the latest Bank of America Corp.’s survey of global fund managers, which showed hawkish central banks are seen as the biggest tail risk for the first time since May 2018, followed by inflation and COVID-19. There is a resurrection. Investors gear up for key policy meetings this week by the Federal Reserve, the European Central Bank and the Bank of England, which could provide clarity on the pace of monetary tightening and wind of stimulus measures.

Here’s a summary of the main findings from the Bloomberg News survey:

downside risk

Most of the respondents said rising inflation or aggressive steps by central banks to check rising prices are the biggest threats for the next year.

Julian Lafarge, chief market strategist at Barclays Private Bank, said: “One of the biggest risks will be an excessive tightening of monetary conditions. Although the conditions for the lifting of the emergency measures are met, it will be challenging for the US and the world. The economy is approaching extreme interest rate hikes, especially from the Fed.”

Concerns over monetary tightening eclipse other risks, including a possible new outbreak of the pandemic, a slowdown in China or geopolitics. Still, that doesn’t mean they’re off the radar. “Unfortunately, COVID, in one form or another, will be there for the foreseeable future,” said Marcus Morris-Eaton, portfolio manager at Allianz Global Investors. “But, the important thing is that we have to become better at managing both the personal and economic consequences.”

For some, the overall enthusiasm in the market is alarming. “We are really in a bubble more than I’ve experienced – the cynicism has vanished,” said Alasdair McKinnon, principal manager of the Scottish Investment Trust, which oversees the nearly $890 billion asset. Speculation is in general rush for crypto, SPAC and IPO businesses.”

inflation threshold

Despite the agreement that inflation is a risk, the level at which it becomes a threat to the equity market is more difficult to pinpoint. For most respondents to Bloomberg’s survey, the problem begins when annual increases in US consumer prices persist above 3%. Still, about a fifth said it would not remove the stock unless inflation was above 5%.

For Salvatore Bruno, head of investment for Generali Investment Partners, the breaking point is annual US inflation that is consistently above 4%. The reaction of the bond market may matter more. Many strategists expect interest rates to not keep up with rising consumer prices, meaning that inflation-adjusted, real returns on bonds will remain too low to make them a viable alternative to stocks.

“We think real rates are important metrics to monitor to understand how markets can derail,” said Bruno, whose firm oversees about $650 billion.

Pascal Blanc, chief investment officer at Amundi, Europe’s largest pure-play asset manager with nearly $2 trillion under management, agrees: “As long as central banks limit nominal rates, and real rates remain so low, There is no substitute for equity.”

Inflation is running at very high levels on both sides of the Atlantic, which survey respondents said should be cause for alarm. While the Federal Reserve and the European Central Bank saw readings during the post-pandemic rebound, that won’t last long, and they “will barely tolerate inflation above 4%-4.5% in 2022,” according to Blank. .

reverse risk

Of course, investors are also in for a surprise on the bullish side. Chief among them is an economy that proves to be more resilient than the current consensus expectations.

“There is still room for a positive growth,” said Hussein Mehdi, macro and investment strategist at HSBC Asset, as households in developed markets have larger savings piles that can be run off more quickly, while supply constraints are more widespread. may decrease rapidly.” Management, which oversees approximately $620 billion. “Strong labor market recovery also supports the consumption outlook, while broader policy settings remain broadly favorable despite changes in normalization.”

The continuation of a strong economic recovery is the basis for a positive outlook on Goldman Sachs Asset Management shares. “We believe we will have a strong growth background in the next year as well,” said Luke Baers, head of fundamental equity client portfolio management at EMEA for GSAM, over the phone. “And while we are aware that inflation and interest rates may begin to rise during 2022, we do not see equity markets being negatively disrupted in the grand scheme of things, as long as the growth dynamic remains strong. ”

For 24% of the survey respondents, inflation proving to be temporary would be the most consequential positive surprise, although some said it would depend on the cause. Stefan Kreuzkamp, ​​chief investment officer at DWS, which oversees about $990 billion, said “falling inflation rates can also have ‘negative’ reasons, that is, a slowdown in growth.”

investment theme

So where are they investing next year?

It’s time to look at cheap, so-called value stocks, as 24% said they are their top choice for 2022, according to the survey results. Respondents in Europe also flagged opportunities in small-caps, while Cesar Perez Ruiz, chief investment officer at Pictet Wealth Management, which oversees about $275 billion, said their bets are on companies with pricing power that all sectors may face inflation.

For Nieves Benito, head of fundamental research at Santander Asset Management, which oversees approximately $220 billion, “volatility is likely to remain high and therefore the top topic will be a market for stock pickers, where valuation disparities may increase as the market The expectation of improvement in fundamentals has been around for a long time.”

Jorge Lagarias, chief economist at Mazar Wealth Management, chose to transition to a lower-carbon and more sustainable economy. “It is no exaggeration to say that funding institutionally directed toward the ESG, not to mention the wall of regulations, is enough to render most other investment disciplines peripheral to the sustainability juggernaut,” he said. said.

As far as geographic selection, respondents tended to favor the region in which they are based: Europeans are highly overweight on European equities, while US-based investors are more confident about US stocks and Asia. -based responses are less pessimistic about China.

For Kevin Thozett, a member of the investment committee at Carmignac, which oversees about $46 billion, “the area where valuations appear most attractive” is emerging markets. “The ability for China to change its policy mix while the US is expected to tighten both its monetary and fiscal policy should provide a supportive backdrop for Chinese equities,” he said.

This story has been published without modification in text from a wire agency feed. Only the title has been changed.