Effective forecasting always has its challenges. However, ongoing inflationary shocks, regulatory upheaval in China and the emergence of Covid's Omicron variant have all made it even trickier this year. Nonetheless, when we look beyond the headlines, we remain optimistic on equities going into 2022.


Prior to the emergence of the Omicron variant, we were encouraged by the world’s progress on Covid. Vaccine rollouts have been successful, particularly in developed markets. While emerging markets have a generally patchier vaccination record, the recent surge in uptake in China has been encouraging.

However, Omicron has given reason to pause. At the time of writing, infection rates had increased in many nations but, that said, it’s too early to say whether this will become more widespread. Encouragingly, the link between infections and hospitalisations appears to be significantly weaker than in Covid's previous incarnations. As it stands, the markets are treating this as a new variant on a known theme, rather than something more malignant. Nevertheless, Covid will clearly remain a prominent factor in the coming months.

Inflation should be transitory

Inflation is another key theme. With economies bouncing back, we’ve been hit with a perfect storm of interrelated inflationary shocks: spiking energy prices, shipping shortages, transport bottlenecks and labour shortages (particularly in the US).

Digging deeper, it’s certainly the case that labour markets remain tight in areas such as restaurants, construction, trucking and skilled labour – particularly specialty tech and IT more generally. This has led to upward pressure on wages, and there are examples of this trend helping to resolve the bottlenecks without too many negative impacts on demand. In US trucking and freight, for example, rising wages have led to an increased supply of truck drivers – helping to ease some of the logistical challenges being experienced across many sectors.

Raw materials inflation also continues, as seen in rising commodity prices and other input costs. However, we are starting to see indications of stabilisation and early stage improvement in input inflation. In Asia, for example, there are tentative signs that the semiconductor/tech shortages are beginning to ease. So much so, in fact, that some areas could even experience oversupply in 2022. Meanwhile, raw materials availability is improving, even as US West Coast shipping ports operate 24/7.

We believe cost inflation will last into next year with hedges rolling off for some, which could potentially start to squeeze margins (as most industries have seen sufficiently strong demand and pricing power to at least hold margins steady thus far). Growing intra-Asian trade should also continue to drive up shipping container costs.

Some sectors have taken temporary margin hits while price rises were being put through and readjusted. By and large, however, the recovery in underlying demand has also allowed many to pass on these costs to consumers. Staples are an exception in several regions but, in aggregate, margins across markets are strong. Indeed, in Europe, margins are already back to pre-Covid highs, although the momentum for further improvements is starting to wane.

Putting this together, we expect to see an ongoing normalisation from disruptions in 2022 especially as, importantly, many companies have been investing in their supply chains. One area to watch for now is potential overordering and inventory build-up in some sectors.


A blizzard of regulatory measures in China created investor uncertainty during the course of 2021, with many recent announcements having a pronounced impact on the property sector. In some cases, these changes and proposals from the government, in the name of addressing inequality, have challenged pre-existing business models. This has affected areas of the market as diverse as e-commerce, education, healthcare and property; unsurprisingly, markets globally have been spooked to a certain degree.

Nevertheless, we believe that fears around China are overdone. While we may be less positive on certain parts of the market, we continue to believe there are many excellent investment opportunities in the country. Private enterprise remains extremely important to its future and, crucially, the government understands this. Indeed, the private sector is the nation’s largest employer and has driven innovation and growth.

Ongoing demand

Demand for IT transformation and continued digitalisation remains strong. Lockdowns have thrown a light on the benefits of remote working and more extensive cloudbased infrastructure, including the advantages this brings in terms of improved business processes and monetisation opportunities. We think these trends will continue.

Another area in which firms are investing is supply-chain improvements. Green capex is also particularly buoyant, and the investment outlook remains positive. Meanwhile, although household incomes are feeling the pinch from higher energy and mortgage costs, wealth has increased thanks to rising asset prices. General consumer demand remains reasonably robust, therefore, as the recovery continues to play out.

On the markets

Corporate earnings have impressed in most areas of the world. That said, the recent reporting season failed to match the heady number of forecast-beating results we saw in 2021's second quarter. Overall, high earnings momentum has driven market performance, with stock prices behaving quite sensitively to earnings releases. Markets have tended to de-rate into this earnings strength but, with most companies raising or maintaining guidance for continued earnings growth, the net impact has been rising markets. The demand recovery is strong, inventories are low and volumes should remain resilient into next year.

Companies have been generating cash, which supports investment – as we have already noted. M&A activity was also lively throughout 2021 and the outlook for dividends and buybacks remains positive, which is good news for investors.

Valuations – where do we go from here?

Overall, we are reasonably sanguine about market valuations – provided the recovery continues. In the UK, cyclically adjusted price-to-earnings ratios are at their long-term averages. Emerging markets look attractively valued relative to developed markets. As for Europe, we are fairly bullish on valuations and the overall outlook. But, in all cases, we need to see a continued delivery on earnings. Our stance is also contingent on a supportive macro backdrop and the absence of further lockdowns, with inflation and the path of monetary policy also continuing to be key market drivers as we move through 2022.