SPDR 2022 Global Market Outlook Implementation Guide

While the world maintains its focus on the battle against COVID, there are reasons for optimism in the months ahead. But as we continue the climb past peak growth and peak policy accommodation, many risks to the outlook remain. We believe there are a range of investment approaches that investors can use to find opportunities in this environment.

Macroeconomic Outlook

From a macroeconomic perspective, 2021 was an extraordinary year. Economists and investors alike are now pondering what the new year will bring. As the recovery continues to deliver above-potential growth globally, we believe it will do so with a bit of a rotation tilt that allows, for example, the eurozone to narrow — and perhaps even close — the growth gap with the US.

The global growth narrative is far from uniform. In emerging markets (EM), growth headwinds persist as lagging vaccination levels, rising interest rates, electoral uncertainties and other domestic policy considerations take their toll. In China, we have downgraded 2022 growth expectations to just 5.0% and still see near-term risks skewed to the downside.

Equity Market Outlook

Volatility is making a comeback. Aggregate levels of volatility have settled in at a higher level in 2021 than we have experienced in recent years; caution is warranted heading into 2022. In particular, we think investors may benefit from seeking pockets of the equity markets where reasonable valuations can give more of a cushion against volatility. Investors can seek to protect against this using the SPDR S&P 500 Low Volatility UCITS ETF or the SPDR EURO STOXX Low Volatility UCITS ETF. To learn more about the ETFs mentioned in this article, and to view full performance histories, please click on the ETF names to visit their fund pages.

European equities are in a sweet spot. US stocks have led global equity performance for years – but we think Europe will pull ahead in 2022. European stocks offer attractive valuations relative to their US counterparts. Furthermore, European equities currently boast the strongest earnings and growth expectations across developed markets. With earnings growth in Europe now expected to outstrip the US, we think equity markets are poised to catch up. Investors can seek to capture this higher growth using the SPDR MSCI Europe UCITS ETF or the SPDR MSCI EMU UCITS ETF.

Fixed Income Market Outlook

Improving fundamentals could support tight credit spreads. Spreads within riskier fixed income sectors, such as investment grade (IG) and high yield (HY) credit, should continue to be well supported by a fundamental picture that has bounced back quickly after a challenged 2020. The overwhelming policy response during COVID, including central banks’ asset purchases of IG and some HY corporate bonds/bond ETFs, helped stabilise credit spreads quickly and limit the depth and breadth of the downturn. Within the current credit cycle, we have transitioned from downturn, to repair, to expansion in less than two years.

As a result, IG corporate fundamentals in the form of leverage ratios, margins and EBITDA growth have improved markedly and are now back to pre-COVID levels. We expect credit spreads to remain relatively compressed moving into 2022 despite valuations already near long-term tights, based on strong fundamentals and foreign investors’ continued demand for yield. Lastly, the more upbeat “rising stars” backdrop will help enable a benign default and downgrade environment. Despite valuations, riskier fixed income spreads still handily outpace government yields and should be a good source of carry in 2022.

Investors can seek to take advantage of narrower IG credit spreads using the SPDR Bloomberg Barclays 1-10 Year US Corporate Bond UCITS ETF or the SPDR Bloomberg Barclays Euro Corporate Bond UCITS ETF. Investors that want an ESG tilt to their credit portfolio may prefer to use the SPDR Bloomberg SASB U.S. Corporate ESG UCITS ETF or the SPDR Bloomberg SASB Euro Corporate ESG UCITS ETF, and investors seeking a higher yield can use the SPDR Bloomberg SASB U.S. High Yield Corporate ESG UCITS ETF.

Figure 1: Summary of Asset Class Views