Central Banks Will Determine Market Direction In 2022: Natixis

Covid-19 is no longer the greatest threat to economic growth, rather central banks and how well they handle inflation will determine how markets perform in 2022, said Natixis Investment Managers in its Global Outlook for 2022.

The Boston-based firm, with $1.39 trillion under management, released its global outlook yesterday. The firm said five key themes will shape its portfolio strategy for the coming year:

·     Actions by central banks.

·     Covid is no longer the greatest threat to growth.

·     The hunt for yield leads to alternatives.

·     Environmental, social and governance (ESG) presents a \green field for investment opportunity.

·     Navigating 2022 will require an active strategy.

The outlook comes from a survey of 500 institutional investors in 29 countries throughout the world. The institutional investors include corporate pension plans, endowments, foundations, government pension plans, central banks, sovereign wealth funds and insurance companies.

Central Banks Hold Key to Institutional Success

Most institutional managers believe that inflation is the top concern for their portfolios, but 60% believe it\’s transitory. About 55% of the institutions believe inflation is structural due to a combination of loose monetary policy and low interest rates. The other 45% think the inflation is cyclical.

\Inflation is happening now because of disruptions from the pandemic, including labor markets,\ said Michael Acton, head of research at AEW Capital Management

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, during a press conference in New York Wednesday where Natixis released its outlook. \That stuff is transitional and will fix itself. The thing people are worried about is monetary policy.\

Acton said the Federal Reserve has doubled the size of its balance sheet and that money supply is running at a year-over-year growth rate of 20%.

\Historically, that\’s where you have inflation,\ said Action.

\Could we be staring at the barrel of a gun over the next 18 months to see how the Fed handles higher inflation? Can it thread the needle?\ asked Andrea DiCenso, portfolio manager at Loomis, Sayles & Company. \Inflation will be higher, but not so much higher for an unprecedented move from central banks.\

About 80% of the institutions said that low interest rates have distorted valuations. The fear that the bull market will end when central banks stop printing money is held by 68% of the managers. About 37% of the managers fear that massive stimulus efforts could lead to unchecked inflation and 58% worry that the stimulus will result in tax increases. 

Policy is Driving Portfolio Risks

Institutional managers said that government policy would be one of the main drivers of portfolio risk in 2022. These risks include inflation, interest rates, asset class valuations, market volatility and ESG issues.

Covid is Not Biggest Threat

Most of the institutions said that Covid-19 is no longer the biggest threat to growth. Forty-five percent of those surveyed expect the economy to fully recovery from Covid next year, Instead, 56% of those surveyed said that supply-chair disruptions pose the greatest risk to an economic recovery and 84% of institutions think supply-chain disruptions will hinder economic growth.

In descending order the top five economic threats:

·     Supply-chain disruptions

·     Less supportive central bank policy

·     Covid variants

·     U.S./China relations

·     China\’s economic growth

2022 Forecast

While survey respondents believe the global economy will not be able to escape the consequences of Covid, most were upbeat.

Most respondents believe that Big Tech continues to grow this year.

Natixis is also forecasting:

·     Small-cap stocks will outperform large-caps

·     Value stocks and defensive portfolios will outperform growth and aggressive portfolios

·     Emerging markets\’ stocks will outperform developed markets.

·     ESG investments will continue to do well

·     And active management will outperform passive investments

Betting on the Reopening Trade

\The reopening trade will be big next year,\ said DiCenso. \It will take precedent over the stay-at-home trade.\

The reopening trade includes restaurants, theaters, and travel.

The Sectors That Will be Winners in 2022

 Among individual industries, 59% of the survey respondents believe the energy sector will outperform the market next year.

Information technology, healthcare, financials and infrastructure are also expected to do well in 2022.

DiCenso said she likes emerging market sovereign debt, especially in Indonesia and South Africa, which have real yield and stable economies.