A majority of respondents said that surging inflation or aggressive moves by central banks to curb rising prices are the biggest dangers for next year.<\/p>\n
“One of the biggest risks would be an over-tightening of monetary conditions,” said Julien Lafargue, chief market strategist at Barclays Private Bank. “While conditions have been met for emergency measures to be removed, it\u2019ll be challenging for the US and the world economy to tolerate excessive interest rate hikes, especially coming from the Fed.”<\/p>\n
Concerns over monetary tightening eclipse other risks, including a potential new flareup of the pandemic, a slowdown in China, or geopolitics. Still, this doesn\u2019t mean that they are off the radar.<\/p>\n
“Covid, unfortunately, will be around, in one form or another, for the foreseeable future,” said Marcus Morris-Eyton, a portfolio manager at Allianz Global Investors, which oversees about $730 billion in assets. “But, importantly, we are becoming better at managing both the personal and the economic consequences.\u201d<\/p>\n
For some, the overall exuberance in the market itself is dangerous. “In reality we\u2019re in a bubble as big as any I\u2019ve experienced – cynicism has disappeared,” said Alasdair McKinnon, lead manager of the Scottish Investment Trust, which oversees about $890 billion in assets. “The most extreme signs of speculation are in crypto, SPACs and the general rush to IPO businesses.”<\/p>\n
Inflation Threshold<\/strong><\/p>\n Despite agreement that inflation is a risk, pinpointing the level at which it becomes a danger for the equity market is trickier.<\/p>\n For most respondents in Bloomberg\u2019s survey, the problem begins when annual growth in U.S. consumer prices is sustained above 3%. Still, almost a fifth said that it won\u2019t derail stocks until inflation holds above 5%.<\/p>\n For Salvatore Bruno, head of investments for Generali Investments Partners, the breaking point is annual US inflation persistently holding above 4%. The bond market\u2019s reaction may matter more.<\/p>\n Many strategists expect that interest rates will not keep up with increases in consumer prices, meaning inflation-adjusted, real yields on bonds will remain too low to make them a viable alternative to stocks.<\/p>\n “We think real rates are the crucial metric to be monitored in order to understand how markets could derail,” said Bruno, whose firm oversees about $650 billion.<\/p>\n Pascal Blanque, chief investment officer at Amundi, Europe\u2019s biggest pure-play asset manager with about $2 trillion under management, agrees: “As long as central banks cap the nominal rates, and real rates remain so low, there is no alternative to equities.”<\/p>\n Inflation on both sides of the Atlantic is running at much higher levels than what the survey\u2019s respondents said should cause alarm.<\/p>\n While the Federal Reserve and the European Central Bank looked past the readings during the post-pandemic rebound, that won\u2019t last for much longer, and they “will barely tolerate inflation above 4%-4.5% in 2022,” according to Blanque.<\/p>\n Upside Risks<\/strong><\/p>\n Of course, investors are also positioning for surprises on the upside. Chief among them is an economy that proves more resilient than current consensus expectations.<\/p>\n “There\u2019s still room for a positive growth surprise given that households in developed markets have large savings piles that can be run down more quickly, while supply shortages could ease more quickly than widely assumed,” said Hussain Mehdi, macro and investment strategist at HSBC Asset Management, which oversees about $620 billion.<\/p>\n “A strong labour market recovery also supports the outlook for consumption, while broad policy settings remain broadly accommodative despite a shift to normalization.”<\/p>\n Continuation of strong economic recovery is the basis of Goldman Sachs Asset Management\u2019s positive view on stocks.<\/p>\n “Our belief is that we\u2019ll still have a robust growth backdrop next year,” Luke Barrs, head of fundamental equity client portfolio management in EMEA for GSAM, said by phone.<\/p>\n “And whilst we\u2019re conscious that inflation and interest rates could start to rise through the course of 2022, we don\u2019t see that negatively impeding equity markets in the grand scheme of things as long as that growth dynamic stays robust.”<\/p>\n For 24% of the survey\u2019s respondents, inflation proving transitory would be the most consequential positive surprise, though some said it would depend on the reasons. “Falling inflation rates can also have \u2018negative\u2019 reasons, i.e. a growth slowdown,” said Stefan Kreuzkamp, chief investment officer at DWS, which oversees about $990 billion.<\/p>\n Investment Themes<\/strong><\/p>\n So where are they investing next year?<\/p>\n According to the survey\u2019s results, the time is finally ripe to look at cheaper, so-called value stocks, as 24% said those are their top pick for 2022.<\/p>\n Respondents in Europe also flagged opportunities in small caps, while Cesar Perez Ruiz, chief investment officer at Pictet Wealth Management, which oversees about $275 billion, said his bet is on companies with pricing power that can weather inflation across sectors.<\/p>\n For Nieves Benito, head of fundamental research at Santander Asset Management, which oversees about $220 billion, “volatility is likely going to continue to be high and hence the top theme would be a market for stock pickers, where valuation disparities surge as markets might take long to anticipate improving fundamentals”.<\/p>\n![\"\"](\"https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2021\/12\/Downside-risks.jpg\")
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