2022 Investment Outlook

Investors have enjoyed bumper returns over the last 18 months. But it’s important to recognise that these returns are, in a large part, borrowed from the future. Strong recent returns in markets means that yields, spreads and risk premia have all compressed. Our measures of asset class expected returns are lower than they were.

That means that the situation is doubly-difficult; a complex macro outlook is exacerbated by higher valuations and lower margins-of-safety in markets. We should expect cross-asset volatility to rise. Stock market volatility remains low today (anchored by tight credit spreads and recent good news on profits). But rate market volatility is already heading higher and, in emerging markets, we see the highest dispersion of stock returns over the last decade.

Today, we measure the expected return on a traditional balanced portfolio at 3.6% before inflation in US dollar terms.

That’s way below historic levels, and below what most investors require and assume, particularly given the arrival of elevated inflation. Many, naturally, are making greater use of alternative asset classes as an additional source of return. Diversification properties may be even more compelling considering the challenge ahead for bonds as a reliable equity hedge.

Quality research has always been about the filling of gaps, and responsible investing, in its infancy, naturally has more holes than most. But solutions are possible with creative thinking, new sources of information, and the power to makes sense of it all via developments in natural language processing and artificial intelligence. As with all active management, it’s about finding value in the noise.

So what to expect in 2022? There is innovation aplenty ahead and lots for investors to look forward to. Call it ESG 2.0. It means taking current developments further and deeper, making use of the latest data and research, blending qualitative and quantitative analysis, and calling out poor best-practice. Next year will also be big for responsible investment in alternatives, liquidity, passive, as well as earth’s oldest asset class – nature.