In a positive outlook for 2022, RBC makes its recommendation of asset classes as it seeks to look beyond the pandemic. It issued a cautionary note, however, about some risks to the US economy.
Equities will be Royal Bank of Canada Wealth Management’s most favoured asset class for 2022, because of an upswing in the business cycle and supportive central bank policy. It is also positive on asset classes such as commodities and select parts of corporate credit.
The Canada-based firm said the global economy should rise faster than long-term trend rates in 2022 although the upswing will prove bumpier than in 2021. RBC Wealth Management outlined its views for 2022. Other major wealth management groups are also setting out asset allocation ideas. Firms are thinking about inflation risks, West-China relations and disruptions to supply chains caused by the pandemic. At the time of writing, there are concerns about the COVID variant, aka omicrom and how serious or not it will be.
“Equities should be the asset class of choice once again in 2022. We recommend holding a moderate overweight position in equities,” Frédérique Carrier, head of investment strategy, said.
Canada’s biggest bank’s new year recommendation is a moderate overweight position on “worthwhile” global equities. It also predicts moderate earnings growth, supported by above-average GDP growth and strong consumer and business capital spending.
The comments appeared in an RBC report entitled The long-term investment landscape: Where to from here.
Influences include major policy reforms by China, such as its regulatory crackdown on technology, banking and real estate – which provoked controversy and market gyrations in recent months. Other background factors include levels of public and private debt in countries (deemed by the bank not to be a significant risk factor), and green energy transformation.
RBC acknowledged that central banks are preparing to raise interest rates, but maintained that equity markets will typically perform well following the first rate hike. It added that even though interest rates will inch higher, they will remain low by historical standards.
Beyond 2023, emergency COVID-19 policy-driven effects should quickly wane, it said, leaving growth in the labour force and increases in productivity to drive the economic bus, pointing to an extended period of slow GDP growth – perhaps slower than in the decade following the financial crisis.
This should lead into a period of intense corporate competition and even greater corporate concentration. Carrier said: “Equities can be rewarding in such an environment. But owning the right ones and avoiding the challenged will be even more essential ingredients of success. Stock selection will be key to portfolio performance.”
As the two-year-long saga of the global pandemic hopefully nears an end, the report said there have been “seismic shifts” in the corporate bond landscape following unprecedented central bank intervention and a notable increase in corporate debt loads in response to the crisis.
Happily, overall the trajectory of the world’s major economies will be shaped by a normal progressive business cycle and the remaining effects of the policies put in place to contend with the pandemic, RBC Wealth Management said.
Carrier continued: “Corporate debt levels have risen, but they can’t simply be looked at in isolation – it’s all relative. Debt levels haven’t strayed too far from long-term trends relative to GDP. Debt is up, but liquidity is improved with record cash on balance sheets, and interest costs are down. Companies could emerge from the pandemic in far better financial positions despite rising debt loads.