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.
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.
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.
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
Information Classification: General Access.
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For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.F: +49 (0)89-55878-440.
For Investors in Finland: The offering of funds by the Companies has been notified to the Financial Supervision Authority in accordance with Section 127 of the Act on Common Funds (29.1.1999/48) and by virtue of confirmation from the Financial Supervision Authority the Companies may publicly distribute their Shares in Finland. Certain information and documents that the Companies must publish in Ireland pursuant to applicable Irish law are translated into Finnish and are available for Finnish investors by contacting State Street Custodial Services (Ireland) Limited, 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.
For Investors in France: This document does not constitute an offer or request to purchase shares in the Company. Any subscription for shares shall be made in accordance with the terms and conditions specified in the complete Prospectus, the KIID, the addenda as well as the Company Supplements. These documents are available from the Company centralizing correspondent: State Street Banque S.A., Coeur Défense - Tour A - La Défense 4 33e étage 100, Esplanade du Général de Gaulle 92 931 Paris La Défense cedex France or on the French part of the site ssga.com/etfs. The Company is an undertaking for collective investment in transferable securities (UCITS) governed by Irish law and accredited by the Central Bank of Ireland as a UCITS in accordance with European Regulations. European Directive no. 2014/91/EU dated 23 July 2014 on UCITS, as amended, established common rules pursuant to the cross-border marketing of UCITS with which they duly comply. This common base does not exclude differentiated implementation. This is why a European UCITS can be sold in France even though its activity does not comply with rules identical to those governing the approval of this type of product in France.The offering of these compartments has been notified to the Autorité des Marchés Financiers (AMF) in accordance with article L214-2-2 of the French Monetary and Financial Code.
For Investors in Germany: The offering of SPDR ETFs by the Companies has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with section 312 of the German Investment Act. Prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. Telephone: +49 (0)89-55878-400. Facsimile: +49 (0)89-55878-440.
Ireland: State Street Global Advisors Europe Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300.
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Norway: The offering of SPDR ETFs by the Companies has been notified to the Financial Supervisory Authority of Norway (Finanstilsynet) in accordance with applicable Norwegian Securities Funds legislation. By virtue of a confirmation letter from the Financial Supervisory Authority dated 28 March 2013 (16 October 2013 for umbrella II) the Companies may market and sell their shares in Norway.
For Investors in Spain: State Street Global Advisors SPDR ETFs Europe I and II plc have been authorised for public distribution in Spain and are registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores) under no.1244 and no.1242. Before investing, investors may obtain a copy of the Prospectus and Key Investor Information Documents, the Marketing Memoranda, the fund rules or instruments of incorporation as well as the annual and semi-annual reports of State Street Global Advisors SPDR ETFs Europe I and II plc from Cecabank, S.A. Alcalá 27, 28014 Madrid (Spain) who is the Spanish Representative, Paying Agent and distributor in Spain or at spdrs.com. The authorised Spanish distributor of State Street Global Advisors SPDR ETFs is available on the website of the Securities Market Commission (Comisión Nacional del Mercado de Valores).
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United Kingdom: The Funds have been registered for distribution in the UK pursuant to the UK’s temporary permissions regime under regulation 62 of the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019. The Funds are directed at 'professional clients' in the UK (as defined in rules made under the Financial Services and Markets Act 2000) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Funds, and compensation will not be available under the UK Financial Services Compensation Scheme.
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The views expressed in this material are the views of SPDR EMEA Strategy & Research through the period ending 13 December 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
International Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.
Investing in high yield fixed income securities, otherwise known as “junk bonds”, is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
Low volatility funds can exhibit relative low volatility and excess returns compared to the Index over the long term; both portfolio investments and returns may differ from those of the Index. The fund may not experience lower volatility or provide returns in excess of the Index and may provide lower returns in periods of a rapidly rising market. Active stock selection may lead to added risk in exchange for the potential outperformance relative to the Index.
The returns on a portfolio of securities which exclude companies that do not meet the portfolio's specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio's ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.
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Investing in foreign domiciled securities may involve risk of capital loss from unfavourable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
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