Key highlights

The recovery from the worst of the pandemic is ushering in a new regime marked by decelerating growth, elevated inflation and a hawkish monetary policy. We believe five themes will dominate markets over the next 12 months and we have identified a range of investment ideas we believe may be effective in helping to navigate portfolios through the period ahead.

The five 'S' that will drive 2022

The COVID pandemic whiplashed the global economy in 2020, resulting in the largest-ever quarterly contraction immediately followed by the strongest quarter’s growth in memory. 2021 has been more stable: supported by generous monetary and fiscal stimulus, the global economy has continued its recovery, leading to surging demand. Supply has struggled to keep up, however, resulting in bottlenecks, rising prices and signs of decelerating economic growth.

The world is healing, but it has not recovered yet.

In 2022, investors will need to adapt to this post-pandemic ‘abnormal normality’. Policymakers must carefully balance controlling inflation with supporting economies that are still dealing with the pandemic. In addition, markets may be at the cusp of a major regime change: a shift to elevated inflation, a shift to rising bond yields, a shift to tighter monetary and fiscal policy. Combined with rich valuations across asset classes, this may lead to uncertainty as investors grapple with unfamiliar challenges.

Although uncertainty can quickly change the circumstances – such as the discovery of the Omicron variant of the coronavirus in November 2021 – we have identified five key themes that we believe will drive the performance of markets over the coming 12 months and beyond:

Slowing growth

Shifting policy

Sorting fundamentals

Seeking sustainability

Softening returns