While the world maintains its focus on the battle against COVID-19, there are reasons for optimism in the months ahead. We believe that the current economic recovery will continue to deliver above-potential global growth; markets are indeed “Continuing the Climb.” But as we move past peak momentum and peak accommodation, the recovery that follows will likely be uneven and multi-layered. Many risks to our outlook remain, including uncertainty about the nature of inflation.
Other urgent issues are returning to the fore. The search for yield in a relatively low-rate environment is causing investors to rethink their fixed income strategies. The climate crisis — one of the defining challenges of our era — is causing investors to search for ways to express their views on climate and related topics. And because the macro rationale for China investment remains intact, investors are searching for the most appropriate ways to access that market. We’ll explore these themes and more in this year’s Global Market 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.
The pandemic remains an important driver of performance; the COVID battle has not been won just yet. One cannot overstate the importance of vigilance in continuing the COVID fight at this stage of the business cycle. This is because the lowest-hanging “re-opening” fruit has already been harvested, and the gains that come next will be harder-won and more modest. In light of the stellar returns of the past year, this is even more true in financial markets than in the real economy. In addition, because financial markets are notoriously forward-looking, the concerns that will accompany the removal of fiscal and (especially) monetary policy accommodation will become more prominent by the middle of 2022.
In many ways, the twin dynamics of high growth and high inflation that dominated the macro narrative in 2021 will extend into 2022. However, while inflation steadily built over the course of 2021, it should steadily decline from mid-2022 onward. The current annual average rate of inflation remains elevated by virtue of arithmetic, but by the middle of 2022 the acute inflation worries that currently dominate headlines should markedly subside. After all, base effects are likely to become serious headwinds a year from now. That said, we do not expect inflation to suddenly disappear. Rather, we expect to see a degree of “inflation rotation” take hold — particularly in the US — as shelter-cost inflation intensifies and offsets easing inflation pressures in other areas. Moreover, though worries around cyclical inflation will subside, the intense debate over possible structural changes to inflation is likely to persist. The two key indicators that we watch in this regard remain business/consumer inflation expectations and wage inflation. Both have moved sharply higher in 2021 to touch multi-year highs, but we would need to see current levels persist before a convincing argument for structurally higher inflation can be made.
We also think that it is worth considering more broadly whether a combination of highly accommodative macro policy, rising production costs in a scenario of “peak globalization,” new costs associated with the green energy transition, and renewed global focus on equitable growth and income redistribution will create a fertile ground where persistently higher rates of inflation might take root. Investors might consider some protection against such a scenario.
Fiscal and Monetary Policy
We are past the moment of peak monetary policy accommodation. EM central banks have clearly led the move toward higher interest rates so far. Given EM’s higher sensitivity to food price inflation, and that in general inflation expectations are less well anchored in EM than in developed markets (DM), this is a reasonable dynamic. Expect DM central banks to jump on the rate-hike bandwagon in increasing numbers over the course of 2022.
For the Fed, the immediate focus is on tapering and then ending asset purchases. The Fed may well accelerate the pace of its quantitative-easing taper in the first quarter as a precautionary step toward creating more optionality around the timing of its first rate hike. Even so, many uncertainties remain regarding the pace of tightening. Recently, markets have swung violently, buffeted by more aggressive pricing-in of tightening expectations, followed by central-bank pushback against those same expectations.
Our view is that much of the inflation we are experiencing today is “baked into the system” — i.e., caused by past fiscal stimulus and current supply chain challenges that central banks are powerless to resolve. Therefore, central-bank efforts to fight inflation with aggressive rate hikes might not only be detrimental to growth, but also ineffectual in taming inflation quickly. Fortunately, central banks know this and will seek to regain control of market and investor expectations. With a bit of luck, the task of central banks should become easier in coming months, allowing for a policy of steady but gradual normalization over 2022 to 2023.
Tactical Portfolio Positioning
Against this macroeconomic backdrop, State Street’s latest monthly tactical portfolio positioning, summarized in Figure 1, remains supportive of risk assets — although we are conscious of near-term risks to the outlook.
Highlights from, and recent changes to, our tactical portfolio positioning include:
We continue to build a position in European equities, which score well across most of the factors we monitor. Valuation, price momentum, and quality are favorable, and sales and earnings estimates have been significantly upgraded.
US equities look reasonable, as buoyant macro factors offset negative valuations. Price momentum, particularly longer-term measures, aid the outlook, but sentiment has moderated and is now neutral. We are overweight both US small caps and US large caps.
Slowing China growth and expectations for further weakening helped to drive the deterioration in our EM outlook. Appreciation of the US dollar is negative for EM, as are low sentiment scores for cyclical sectors.
Within fixed income, we have increased our allocation to high yield bonds, which allows us to improve our expected return while picking up additional yield.
From a sector perspective, we have maintained our allocations to technology and financials, and a partial allocation to energy. We rotated out of consumer staples and initiated a partial allocation in materials.
The recovery will continue to deliver above-potential global growth, but recovery will also be uneven.
The eurozone has a chance to narrow — or even close — the growth gap with the United States.
The lowest-hanging fruit from the re-opening trade has already been harvested; future gains will be more modest.
High growth and high inflation will extend into 2022; however, we think inflation will steadily decline from Q2 2022 onward.
Conditions for structurally higher inflation could be set by highly accommodative macro policy, rising production costs, new costs associated with the switch to green energy, and renewed global focus on equitable growth and income redistribution.
Central-bank efforts may prove ineffectual and could also hurt growth prospects — but central banks are aware of this possibility and will seek to regain control of market and investor expectations.
We remain overweight to risk assets in our tactical portfolio and have continued to build our position in European equities, which are attractively valued and score well on most of the attributes we monitor.
The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
The views expressed in this material are the views of State Street Global Advisors through December 6, 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.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.
Equity securities may fluctuate in value 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 raise, 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.
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.
There are risks associated with investing in Real Assets and the Real Assets sector, including real estate, precious metals and natural resources. Investments can be significantly affected by events relating to these industries.
Israel: No action has been taken or will be taken in Israel that would permit a public offering of the Securities or distribution of this sales brochure to the public in Israel. This sales brochure has not been approved by the Israel Securities Authority (the ‘ISA’).
Accordingly, the Securities shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1978, which has confirmed in writing that it falls within one of the categories listed therein (accompanied by external confirmation where this is required under ISA guidelines), that it is aware of the implications of being considered such an investor and consents thereto, and further that the Securities are being purchased for its own account and not for the purpose of re-sale or distribution.
This sales brochure may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have been sent. Nothing in this sales brochure should be considered investment advice or investment marketing as defined in the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 1995 (“the Investment Advice Law”). Investors are encouraged to seek competent investment advice from a locally licensed investment advisor prior to making any investment. State Street is not licensed under the Investment Advice Law, nor does it carry the insurance as required of a licensee thereunder.
This sales brochure does not constitute an offer to sell or solicitation of an offer to buy any securities other than the Securities offered hereby, nor does it constitute an offer to sell to or solicitation of an offer to buy from any person or persons in any state or other jurisdiction in which such offer or solicitation would be unlawful, or in which the person making such offer or solicitation is not qualified to do so, or to a person or persons to whom it is unlawful to make such offer or solicitation.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable 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.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-800-997-7327, download a prospectus or summary prospectus now, or talk to your financial advisor. Read it carefully before investing.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. The SSGA ® Funds pay State Street Bank and Trust Company for its services and custodian, transfer agent and shareholder servicing agent and pays SSGA Funds Management, Inc. for investment advisory services.
THIS SITE IS INTENDED FOR QUALIFIED INVESTORS ONLY.
No Offer/Local Restrictions
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. SSGA Intermediary Business offers a number of products and services designed specifically for various categories of investors. Not all products will be available to all investors. The information provided on the Site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
All persons and entities accessing the Site do so on their own initiative and are responsible for compliance with applicable local laws and regulations. The Site is not directed to any person in any jurisdiction where the publication or availability of the Site is prohibited, by reason of that person's nationality, residence or otherwise. Persons under these restrictions must not access the Site.
Information for Non-U.S. Investors:
The products and services described on this web site are intended to be made available only to persons in the United States, and the information on this web site is only for such persons. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.