Discovery Invest shares its market outlook for 2022

Johannesburg, 14 February 2022 - With 2021 characterised as a year of strong market recovery from the shock caused by the global outbreak of COVID-19, the scene for 2022 remains positive, albeit with some uncertainty.

Kenny Rabson, CEO of Discovery Invest, says that while the worst is likely behind us in terms of the market impact of COVID-19, its longer-term effects are continuing to influence the global economy.

“Following the market turbulence caused by the global outbreak of the SARS-COV-II pandemic, and the market resurgence which took place last year, we are now entering a period which is becoming increasingly coloured by high levels of inflation in many countries across the globe.”

“While we are optimistic that both global and local equities are positioned to deliver positive returns in 2022, the consensus among our partners is that we are entering a new market regime and are unlikely to see a repeat of last year’s stellar gains.”

“Compelling opportunities remain but capitalising on them is likely to require skillful active asset management, given the new set of challenges that confront investors in 2022.”

Discovery Invest’s local funds are managed by Ninety-One. In 2020, Discovery Invest launched a greatly enhanced global investment solution that uses Shared-value to create the opportunity for investors to invest below the prevailing exchange rate and utilise asset allocations provided by BlackRock and Goldman Sachs Asset Management (GSAM), world leaders in asset management.

A review of the year that was 

The year 2021 was a year of recovery and saw strong returns for markets across the globe, despite the headwinds that persisted due to the pandemic.

Indexes in the US recorded double-digit gains across the board, with S&P 500 up 26.9% for the year, and the MSCI Europe Index, which captures large and mid-cap representations across 15 developed countries in Europe, grew 16.9%.

South African stocks, meanwhile, closed out their best year since 2009 with the FTSE/JSE All Share Index up 24% driven partly by a surge in resource stocks, small caps and blue-chip stocks that had started the year at significant discounts.

This performance saw local equities on a closer par to developed markets with the MSCI World Index, which captures the performance of equities in 23 developed markets, up by 22.35% for the year while the MSCI Emerging Markets Index was down by 2.22%.

What lies ahead 

The recovery of global markets in 2021 was driven largely by a macro-economic recovery as many countries began to ease lockdown measures as the global vaccine rollout gathered momentum.

Yet, “as we’re reminded almost daily, the pandemic isn’t over,” says Goldman Sachs Asset Management’s 2022 Investment Ideas market outlook.

“Prices rose just about everywhere in 2021,” and much of this “can be traced directly to the COVID-19 pandemic” as global supply and labour shortages, caused by lockdown measures and health concerns, met rising energy prices, pent-up consumer demand and the aggressive fiscal stimulus implemented by many developed governments across the world.

Faced with a complex macro backdrop, central banks will be seeking to normalise policy to keep inflation in check, and this might create some volatility in the short term. But eventually, markets tend to digest higher rates, particularly when the backdrop remains one of strong global growth, like the one we expect for this year.”

For much of 2021 this rising inflation appeared transitory, however concerns had been intensifying throughout the year and current consensus has begun to settle on the idea that the supply and demand mismatches driving it are here to stay, for now.

“Higher inflation has arrived” concurs BlackRock, in its 2022 EMEA Implementation Guide, as it suggests that this is unlikely to be a purely transitory phenomenon. “We see inflation moderating from its peak as we progress in 2022, then settling at levels higher than pre-Covid whenever these supply bottlenecks ease,” says Karim Chedid, Senior Strategist for EII EMEA at BlackRock.

Beyond undermining consumer purchasing power and the gains to be made from investments in real terms, this inflationary environment is set to cause rising interest rates and a gradual reduction in fiscal stimulus, as Developed Market central banks look set to begin normalising policy.

Meanwhile, Ninety One’s 2022 Global Outlook says “financial ‘normalisation’”– central banks’ return to conventional monetary policy after years of abnormally accommodative stances – may be a difficult transition, potentially exposing markets to significant stresses in the year ahead. If inflation concerns do not taper, and interest rates globally are raised more aggressively than expected to tame this inflation, it would have a negative impact on bonds and equities, but especially growth equities such as tech stocks, where high expected future earnings are discounted at a steeper rate.

“With Western central-bank policy normalising, economic growth rates diverging and global trade still readjusting to life after lockdown, investors have a complex environment to navigate in 2022,” according to Ninety-One.

Opportunities remain

Despite inflationary concerns, the world continues to open up, providing some impetus for growth in 2022. While the year promises to be a more challenging one for developed markets, the consensus remains that careful selection of global equities holds an opportunity for growth.

Rabson says it remains important for investors to have broad and global, diversification in their portfolios.

“Equities have historically provided investors with the best chance of outperforming inflation but selectivity through active management is likely to be essential in this environment.”

ENDS