Brewin Dolphin : Deceleration, inflation, and consolidation to characterise 2022, says Brewin Dolphin

An economic deceleration, enduring inflation, and fiscal consolidation are among the biggest influences that could shape the global economy and equity markets in 2022, according to Brewin Dolphin.

The wealth manager said that after a broadly good year for investors in 2021, a combination of factors could lead to a more challenging 12 months ahead: not least in the form of the Omicron variant and the shorter and sharper phases of the economic cycle that have emerged since the pandemic began.

Guy Foster, chief strategist at Brewin Dolphin, commented: "The clear potential banana skin for equity markets is the Omicron variant. Obviously, there is only so much we know about Omicron at this stage, but the better news is that Covid-19 generally does not have the same overall risk factor it did at the beginning of 2020. We now know that the technology exists to deliver a solution for variants, even if it takes time.

"As we move into 2022, our focus will be on where we are in the economic cycle. The economy has suffered its steepest recession and its sharpest recovery in modern history and the market has reflected this with one of the most intense bull markets on record. These phases of the economic cycle have been short and sharp. The question is whether having recovered from such a shock, the cycle can slow down to a more relaxed cruising speed."

1. Economic and profit growth to slow
Guy Foster said: "Economic and profit growth will inevitably slow from the breakneck pace of 2021. Historically, each economic cycle tends to be punctuated by a series of mini cycles in which growth accelerates and decelerates without falling into recession - with that, we should expect one of these decelerations during 2022. This would normally be a strong environment for equities and provide stability for bonds, but we must also be alive to the risk that the hyper-compressed cycle features few oscillations between recessions."

2. Inflation to endure
Guy Foster said: "We expect inflation to remain in focus for the first half of 2022, at least. As the base effects from last year wash out, supply chains gradually unclog, and if the current weakness in oil prices persists, then inflationary pressure may ease - but this will likely only happen towards the end of the year. Should inflationary pressures persist, central banks will need to step up their inflation-fighting activity - such as higher interest rates and lower asset purchases - which would be unfavourable for markets."

3. Fiscal consolidation
Guy Foster said: "We expect a period of fiscal consolidation to take place over the next 12 months. Most governments have really compromised their fiscal positions, after spending on large programmes - such as furlough schemes - to support their economies through the worst of the pandemic. Many, if not all, of them will be keen to try and bring their public finances under some form of control, either through spending cuts or tax rises. In the US, in particular, November's mid-term elections seem likely to pass control of the House of Representatives, at least, back to the Republicans, who will not want to support Democratic spending initiatives."

4. US and growth stocks to outperform
Guy Foster said: "In terms of our positioning for 2022, we would expect to remain meaningfully invested in equities. While our expectation of a deceleration of growth is a less positive environment for stocks than the recovery and expansion phases, deceleration is still normally positive. It's also a phase in which secular growth equities tend to outperform more cyclical names. That has typically seen US outperformance, which would seem to be more than justified this time around in our view. The clear challenge to that would be that this style and region have already been so strong for so long. However, when we look at valuations between secular growth stocks and cyclical equities - which, admittedly, are not easy to compare - we would still expect growth to outperform during a deceleration."

5. Long-term outlook challenging for Chinese tech companies
Guy Foster said: "Chinese returns have been weighed down by two very clear themes. One has been the underperformance of Chinese technology companies. Most of these are listed in the US through variable interest entities, held via American Depository Receipts. The selling has accelerated as the prospect of delisting in the USA and relisting in China has been raised, specifically by Didi. The shares seem overly concerned about a relisting that should have little fundamental impact on the companies. However, the long-term outlook is challenging for Chinese tech platforms, which are now expected to contribute towards common prosperity in China. The other weight dragging the Chinese equity market lower is real estate. The sector will likely suffer repeated bad news going into 2022, while more help will be offered to the banking sector to prevent a wider financial crisis."

Five-year discrete total return performance, by index:

Market Indices	2021 (YTD)	2020	2019	2018	2017	2016
S&P 500	27.28%	14.74%	26.41%	1.56%	11.29%	33.55%
Nasdaq	25.31%	40.44%	31.42%	3.20%	18.42%	29.86%
France CAC 40	17.74%	0.40%	23.15%	-6.97%	17.22%	26.10%
MSCI Europe	13.36%	2.66%	19.78%	-9.00%	15.31%	19.55%
FTSE 100	13.07%	-11.55%	17.32%	-8.73%	11.95%	19.07%
Euro Stoxx	11.75%	6.50%	20.02%	-11.06%	17.90%	21.64%
DAX	4.62%	9.38%	18.46%	-17.35%	17.00%	23.77%
TOPIX	2.40%	9.54%	14.64%	-8.35%	15.58%	23.42%
Shenzen CSI	0.08%	34.08%	31.89%	-23.07%	21.12%	1.14%
MSCI Emerging Markets	-0.92%	15.02%	14.26%	-8.83%	25.83%	33.11%
Nikkei 225	-3.29%	20.63%	17.71%	-2.16%	14.75%	25.95%
Hang Seng	-9.11%	-2.89%	9.20%	-5.13%	28.00%	24.36%

Source: Refinitiv Datastream

Five-year discrete total return performance, by commodity:

Asset Classes	2021 (YTD)	2020	2019	2018	2017	2016
Crude Oil (WTI)	41.63%	-23.40%	30.11%	-20.64%	2.71%	73.02%
Global REITS	29.60%	-7.74%	22.14%	1.08%	2.00%	25.40%
Copper	26.88%	22.13%	-0.63%	-12.33%	19.19%	40.00%
Global Equities	21.20%	12.90%	23.44%	-2.50%	12.42%	29.01%
UK Index Linked Gilts	10.08%	11.18%	6.22%	-0.17%	2.42%	19.90%
Absolute Return	4.50%	-0.45%	0.34%	5.69%	-5.56%	19.65%
US Treasuries	1.72%	3.83%	2.10%	7.33%	-6.71%	20.00%
UK Gilts	-2.50%	8.85%	6.89%	0.50%	1.86%	10.07%
Gold	-3.09%	20.96%	14.08%	4.41%	2.86%	29.96%

Source: Refinitiv Datastream

Disclaimers

The value of investments can fall and you may get back less than you invested., Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance., Investment values may increase or decrease as a result of currency fluctuations., Information is provided only as an example and is not a recommendation to pursue a particular strategy., We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk., Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

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NOTES TO EDITORS
About Brewin Dolphin
Brewin Dolphin is a UK FTSE 250 provider of discretionary wealth management. With £56.9* billion in total funds, we offer award-winning, personalised wealth management services that meet the varied needs of our clients including individuals, charities and corporates.

We give clients security and wellbeing by helping them to protect and grow their wealth, in order to achieve their goals and aspirations. Our services range from bespoke, discretionary investment management to retirement planning and tax-efficient investing. Our focus on discretionary investment management has led to significant growth in client funds and we now manage £49.8* billion on a discretionary basis.

Our intermediary business manages £18.1* billion of assets for over 1,700 advice firms either on a discretionary basis or via our Managed Portfolio Service, the MI Brewin Dolphin Voyager fund range and Sustainable MPS.

In line with the premium we place on personal relationships, we've built a network of 34 offices across the UK, Jersey and Republic of Ireland, staffed by qualified investment managers and financial planners. We are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients' needs at the core.

For more information, visit: www.brewin.co.uk

*as at 30th September 2021.