VP Bank : Outlook 2022 - Betting on "transitory"

With order books at record levels, companies should be able to look ahead with confidence, though supply problems are pushing up producer prices. Basically, the economic outlook for 2022 is very positive. However, the speed of the recovery will depend on when shipping delays are resolved and supply chains restored to normal. Only then will firms be able to dig into their order backlogs.

Falling inflation

Forecasting the inflation trend is somewhat easier. After the acceleration in 2021, this year's year-on-year price rises will be less dramatic. Even so, inflation rates are unlikely to fall to pre-pandemic levels. We expect them to approximate to the central banks' relaxed targets.

Financial markets have coped with these uncertainties extremely well so far. Investors are reacting calmly and refusing to be rattled. Supply bottlenecks, materials shortages and rising inflation are regarded as transitory phenomena, not serious enough to undermine sentiment. This judgment is probably correct. But the market's optimistic expectations make it vulnerable to disappointments.

Investors' assumptions are in line with central bank thinking. The official scenario likewise assumes that current economic stresses and strains will be transitory. In 2022, the central banks will gradually abandon their crisis policy. In doing so, they will move at different speeds, which is why no interest rate hikes are expected in Europe and Switzerland yet.b Given the expansionary bias of fiscal policy and the strong economic outlook, the planned adjustments do not add up to a fundamental change of course. The central banks' frank information policy is also helpful. The markets can therefore take the expected measures in their stride.

Equities well supported

Nevertheless, the tapering of ultra-expansionary monetary policies and rising bond yields could put pressure on today's high equity valuations, especially in the United States. Doubts as to whether the central banks might be forced into a sharper change of course may well trigger occasional higher volatility. Even so, equity markets are still well supported, given the unattractiveness of fixed income assets at a time when inflation-adjusted yields are in negative territory.

We recommend a growth-oriented positioning. This should not be achieved by an aggressive equity allocation but rather by significantly underweighting bonds. The economic outlook is better than it has been in a long time, but the financial markets have already anticipated a lot. Any doubts about the positive scenario would create good buying opportunities.

We wish you a successful start and look forward to supporting you with our analysis in 2022!