Crypto, inflation and energy transition. We believe these will be the top themes of 2022 and present compelling areas of investment opportunity over the next few years, as CEO Jan van Eck discussed in his investment outlook. The transformational potential of each of these themes is immense and may be with us for the foreseeable future.
We have seen crypto disruption expand across the financial system and expect this to continue. The decentralized finance (DeFi) ecosystem is maturing and becoming a potential competitor to legacy financial intermediaries and global investment banks. 2021 also saw the first country, El Salvador, declaring Bitcoin as legal tender, and we would not be surprised to see another doing the same in 2022.
Inflation pressures may linger through 2022 and pose a risk of spiraling into a more persistent economic factor. Investors haven’t faced inflation risk since the early-to-mid 2000s, and the most notable inflation period prior to that was in the 1970s, which may mean that their portfolios are not positioned for a prolonged inflationary environment. Historically in these market environments, real assets—including natural resources and commodities—have outperformed stocks and bonds.
Average 12-Month Real Return When CPI Is At or Above Certain Levels (1969-1981)
Source: Bloomberg. Past performance is no guarantee of future results. The lack of a long index track record limits some of the data availability of some assets classes for this period. See definitions and disclosures below.
Average 12-Month Real Return When CPI Is At or Above Certain Levels (2003-2007)
Source: Bloomberg. Past performance is no guarantee of future results. See definitions and disclosures below.
Against this supportive macro backdrop for commodities, the energy and resources transition continues to progress. We believe this is creating a myriad of opportunities for investors along the way, from the green metals and minerals to fuel renewable energy technologies, such as batteries technology and electric vehicles, to sustainable agriculture and food production industries.
As investors plan their 2022 allocations, we spoke to a group of our experienced investment professionals to gather their insights on what to expect for their respective asset classes.
Q: What will have the biggest impact on your outlook through the end of the year and for 2022?
JOE FOSTER, PORTFOLIO MANAGER, GOLD STRATEGY: Inflation. The longer it persists, the more gold stands to gain.
DAVID SCHASSLER, PORTFOLIO MANAGER AND HEAD OF QUANTITATIVE INVESTMENT SOLUTIONS: The level of inflation and how the Federal Reserve (Fed) reacts to it will have the largest impact on the markets. The transitory argument is no longer credible. Inflation is high and broad. The year-over-year change in the CPI is 6.2% and almost all of the categories in the CPI basket are up over 4% this year.
Price instability has been identified as a key risk, and it will be met with less accommodative policy. However, less accommodative economic policy is not the same thing as restrictive policy. Trillions of dollars in fiscal spending, interest rates at zero percent and a Fed that is still purchasing mortgage-backed securities and Treasuries is creating, not fighting, inflation.
Allowing inflation to run too hot for too long will amplify the problems. If high inflation continues, which we expect, attempts at bold policy action will likely be met with market turmoil. The debt levels and political climate will make economically destructive policy action untenable. Therefore, we would expect inflation to be higher this decade than the last and, with that, a sustained bull market in real assets.
SHAWN REYNOLDS, PORTFOLIO MANAGER, NATURAL RESOURCES EQUITY AND ENVIRONMENTAL SUSTAINABILITY STRATEGIES: The resources sector remains highly leveraged to inflation and global growth—both themes which have dominated headlines and which have been significant drivers of performance over the last year and a half. Anticipated interest rate hikes and recently stalled recovery efforts (due to supply chain issues, the advent of COVID variants, etc.) have, we believe, only modestly impacted investor sentiment for now. Though we continue to believe that the prevailing macroeconomic sentiment will be one of higher-than-anticipated inflation and stronger-than-expected growth, we remain cautiously optimistic.
We are otherwise strongly encouraged by the fundamental, company-specific outlook for many of the names we follow in the space. We continue to focus on companies’ efficiency gains, historic free cash flow generation and commitment to capital discipline in the face of a dramatic rise in underlying commodity prices. Many of these same companies—and their associated sub-sectors—still continue to trade at a significant discount, too, to both their longer-term averages and relative to other sub-sectors.
ROLAND MORRIS, PORTFOLIO MANAGER AND STRATEGIST: Commodities had a very good 2021. Commodity index products are likely to continue to benefit from positive roll yield in the futures markets next year.
The outlook for inflation and global growth are the two most important factors influencing commodity markets. Inflation has become less transitory and more persistent in the U.S. economy as both wages and housing costs continue to rise. Global growth is likely to face some headwinds this winter, which could restrain global growth and demand for commodities. China is slowing as they struggle to deflate their leveraged real estate markets. Europe is facing some of the highest energy costs in decades this winter, which could rise even more if we have a cold winter, resulting in slower growth. Even U.S. growth could slow this winter as the emergency fiscal stimulus fades and the Federal Reserve (Fed) tapers quantitative easing, tightening monetary policy at the margin.
DAVID SEMPLE, PORTFOLIO MANAGER, EMERGING MARKETS EQUITY STRATEGY: Emerging markets countries will continue to normalize economic activity, as COVID-19 becomes endemic. We expect inflationary pressures to dissipate through 2022 in particular for emerging markets. China growth will be sluggish for one or two quarters more, but we expect increased policy softening to help secure better growth rates in 2022. If inflation persists for longer than we anticipate in the U.S., a more hawkish Fed, compared to other major central banks, would tend to be dollar positive and, consequently, unhelpful for dollar based emerging markets returns.
JIM COLBY, PORTFOLIO MANAGER AND STRATEGIST, MUNICIPAL BONDS: There are two issues that stand out that may potentially have the largest impact on municipal bonds in 2022:
- (POSITIVE) The newly signed infrastructure initiative will bring billions in municipal financing to the marketplace. This means that demand may potentially be met by supply, and bond valuations will be far more palatable in terms of spread and relative value for clients. This will be true for both investment grade as well as high yield.
- (NEGATIVE) The pace of economic recovery will continue to pressure the Fed to remove accommodation, likely pushing rates higher and bond prices lower. While this happens, it will potentially have a dampening impact upon bonds and investment.
ERIC FINE, PORTFOLIO MANAGER, EMERGING MARKETS BOND STRATEGY: The Fed. If they hike earlier than expected, which we reckon they will do, that will push up front-end interest rates and the U.S. dollar. It will be viewed as risk-off for a lot of emerging markets. But, it might not be that bad for the U.S. economy, as there remains a lot of fiscal stimulus.
FRAN RODILOSSO, CFA, HEAD OF FIXED INCOME ETF PORTFOLIO MANAGEMENT: For fixed income markets, there is no doubt that the path(s) the Fed, and potentially other developed market central banks, take towards exiting ultra-accommodative monetary policies amid the prospect of rising inflation will be a major factor for the next year and beyond. While it is possible that the narrative around inflation replaces the term “transitory” (which has already been disavowed) with “base effects,” which would be to suggest that higher prices remain in place but the pace of increase decelerates, inflationary expectations one way or the other will be a key driver of bond market returns.
For now, we continue to favor credit over duration within fixed income, but after the spread compression experienced in 2021, we caution against straying too far out the credit curve. The continued global response to COVID-19, vaccination rates and the emergence (or not) of concerning variants will greatly influence our currently positive views on global growth going forward. We are also very interested to see how a couple of longer-term trends influence the make-up and evolution of debt capital markets. Regardless of the reasonableness of the zero net emissions by 2050 goal, the transition towards renewables and electrification is irreversible. We believe the scope of investment will be unprecedented, and we expect to see exponential growth in green financing starting now. The evolution of blockchain based financial services should begin to lead to new product and investment ideas. This notion does not concern the proliferation of digital currencies, which while significant is also highly speculative.
MATTHEW SIGEL, HEAD OF DIGITAL ASSETS RESEARCH: Economic activity on open-source blockchains accelerated in 2021, as we estimate close to $8T have been sent across the Bitcoin and Ethereum networks this year. Individuals, corporates and sovereigns have begun to realize the cost and speed savings associated with digital assets, but overall penetration rates are still extremely low.
We believe the fundamental momentum is sustainable…
Read More: 2022 Outlook Q&A: Crypto, Inflation and Energy Transition | ETF Trends