According to the Dutch private banking group, strength in the world economy peaked in 2021. Returns in the new year are therefore expected to be more modest than in the recent past, it said.

The group set out its views on where clients should position their portfolios at a time when policymakers are wrestling with supply chain disruptions, rising inflation – highlighted by energy costs – and the need to repair ravaged public accounts brought about by COVID-19. 

Global equity markets have overall been strong in 2021. The MSCI World Index of developed countries’ equities shows total returns from early January through to 1 December of more than 16 per cent (capital growth plus reinvested dividends).

The bank’s 2022 investment report, The path from the peak, released yesterday, states that economic forecasts and the corporate earnings outlook are “robust.” But the report states that with economies having now peaked and with central bank policies likely to diverge, greater volatility in the financial markets and more subdued investment returns may be expected in 2022.

“Having passed its peak, the global economy will continue to show above-trend into 2022,” Richard de Groot, head of ABN AMRO’s investment centre, said.

“Mainly this will be driven by the US and European economies, with conducive factors including accommodating financial conditions, supportive fiscal policies and corporate earnings growth in the high single digits.

“Inflation is a risk, of course, particularly in the US, but we expect to see this normalise as 2022 progresses. Supply-side issues should dissipate gradually,” he said.

More positively, the bank expects an overweight position in equities to be the main driver of returns. The private bank said it will be keeping its slight cyclical bias in its equities portfolio, and reiterated its sanguine take on the industrials, materials, financial services and consumer discretionary sectors. The bank is overweight in these sectors.

In the report, the bank also said that IT (neutral) and healthcare (slightly overweight) should continue to benefit from long-term trends such as digitalisation and an ageing population. It is more cautious (underweight) about the communication services and consumer staples sectors. The energy sector is also underweighted: the bank expects oil and gas prices to remain high for now, but to edge down in the course of 2022.

From a regional perspective, it is opting for a balanced stance, keeping its view neutral on all three equity regions – the US, Europe and the emerging markets.

In terms of themes, the bank will flag investment opportunities in innovative companies facilitating the technological transformation in healthcare.

Riskier bond sectors preferred
Bonds (underweight) continue to feature in investment portfolios, despite negative interest rates on eurozone government bonds, the bank said. It prefers riskier bond sectors that command higher potential returns.

“We expect financial conditions to remain healthy, as global yield and credit markets are deep and highly diverse. This wide array of bond instruments and markets means that various subsectors respond differently to economic signals and company-specific developments.

“High-grade corporate bonds, high-yield bonds and emerging market debt are looking at potentially higher returns and we see opportunities for investors,” de Groot said.

Losing ground
The euro will weaken further against the dollar, according to the report, as the US Federal Reserve considers starting to raise interest rates well before the European Central Bank.

The bank expects the Federal Reserve to taper its asset purchases in the first six months of 2022 and then raise its official rates in three increments in 2022, starting in or around June.

By contrast, the ECB has made it clear that no rate hikes are on the cards for 2022. ABN AMRO said that this monetary divergence will weaken the euro/dollar rate further and the exchange rate will end up at around 1.05 by the end of 2022. (As of 2 December, the rate was around 1.13.)