For investors, 2021 began as a sort of Mount Everest, with intimidating headwinds and uncertainties that appeared almost too daunting to scale. At more than 29,000 feet, Everest is the tallest mountain in the world. Yet, according to many professional climbers, it does not even make the top-10 list of most difficult mountains to climb. As it turned out, so too was 2021 from an investment perspective. It was one of the strongest years for global equity performance in 20 years. Heading into 2022, with some of the same headwinds still lingering — namely the pandemic — as well as new ones like inflation and fading monetary and fiscal stimulus, it is appropriate to consider what this year’s investment mountain will be and more importantly, how to climb it.
A common theme is emerging across markets: growth is expected to slow in 2022. In 2021, there were several factors creating positive momentum for the economy and markets that are not expected to continue into next year. First, the base effects of comparing the lows of 2020 with the snapback in activity once the economic reopening process began created extreme year-over-year growth rates, an effect that is expected to fade. Second, markets were flooded with support from monetary and fiscal stimulus in response to the pandemic, but both are set to be curtailed. Finally, investors had the pleasant surprise of an earnings reacceleration; however, in line with the base effects concept, the same earnings trajectory is not expected to continue.
Many economic estimates and forward indicators support a slowing growth outlook. According to International Monetary Fund forecasts, global GDP is expected to slow from 5.9% in 2021 to 4.9% in 2022. Likewise, the consensus earnings growth estimate for the MSCI All Country World Index, representing approximately 85% of global equities, is expected to decrease from 47% in 2021 to 6% in 2022. From a leading economic indicator (LEI) perspective, the rolling six-month average of the Conference Board US Leading Economic Indicators Index declined in October after increasing every month since September 2020. Some LEIs experienced their highest growth rate on record earlier in the year, only to decelerate at a rapid rate. Given these datapoints, among others, we believe there is a shift underway in the business cycle from a broad market rally toward a more narrowly driven slowing expansion.