Wall Street firm's outlook for 2022 calls for investors to reassess their asset allocations
With the Omicron variant disrupting a large part of the global economy now, there are significant challenges in the months ahead.
But the latest outlook from Citi Global Wealth Investments suggests that the ‘great rebound’ – the strongest phase of economic and market recovery from the pandemic – has already happened.
That gives way to a more normal period with the equity bull market maturing to give more modest returns than we have seen in recent months.
Citi does not suggest that investors ignore the need to assess and make some important changes to their portfolio asset allocations.
A year ago, the advice was to prepare for a rebound for the industries most impacted by the early phase of the pandemic, including emerging markets, small-cap equities, and beaten-down cyclicals.
However, heading into 2022, Citi says investors should be looking at “long-term leaders”, equities in those high-quality companies that may deliver growth over the long term.
The outlook highlights that these stocks historically deliver strong returns with lower volatility over time.
Overall, while 2021 has provided a 45% rise in global earnings per share, Citi sees a more normal 8% gain in 2022. Equities could see returns in the mid-to-high single-digit range with global fixed income returning 0% to 1% before inflation.
Negative real interest rates
Citi’s outlook also warns of the risk to wealth from negative real interest rates with bond yields low while inflation is up.
“As we warned in last year’s report, the owners of cash and many bonds have suffered a loss of purchasing power in 2021,” said David Bailin, Chief Investment Officer and Head of Citi Global Wealth Investments. “We compare the effect of negative real rates to the activities of a cash thief, who we expect to remain at large in 2022. But we see various investments that may help clients preserve and grow purchasing power in the face of this threat.”
While there is risk ahead, there is also opportunity, not least from emerging and growing tech trends such as cybersecurity, 5G and related technologies and fintech.
The economic power shift towards Asia, and new working and shopping habits are also worth exploring.
“While we reiterate the importance of keeping portfolios positively positioned and fully invested, we also acknowledge a range of risks,” said Steven Wieting, Chief Investment Strategist and Chief Economist at Citi Global Wealth Investments. “The potential for vaccine-resistant COVID mutations, deteriorating US-China relations, large-scale cyberattacks and evolving consumer spending habits based on inflation expectations all require close monitoring.”
The Citi Outlook was compiled in early December.
