In the post-pandemic cycle, we are faced with a set of conditions that are different to past decades. One of the biggest concerns for 2022 is the trade-off between inflation and growth. The combination of excess debt, excess speculation, high starting valuations, and higher non-transitory inflation imply increasing risk of slower profit growth, monetary/fiscal tightening and more valuation compression. We think the post-Covid cycle brings elevated risks of a ‘flat but volatile’ equity market regime.
In this paper, we present the key risks that equity investors should to hedge for as we enter 2022, and where we see defensive equities playing a role in hedging those risks.