As the Tide Shifts: Waiting for a More Balanced World

12.30.2021 - Viraj B. Patel, CFA, FRM, CAIA, Head of Asset Allocation

With supply and demand imbalances and rising inflation dominating 2021, we think the economic environment will ultimately begin to normalize in 2022. This will likely revolve around a moderation in inflation and a reduction in emergency policy measures. With peak liquidity conditions behind us and the potential for rate hikes in 2022, market returns could be more in line with long-term averages. This expansionary environment and the potential for above trend economic growth should continue to support equities, while alternatives and cash can provide protection against heightened volatility.

Equities: Favoring Growth and Quality

With the economic expansion likely to continue next year, growth and quality styles should continue to outperform. US large-cap equities should benefit given the high weighting to these styles. Despite the potential margin pressure from inflation, US earnings are still expected to grow at a healthy 8% next year. While international markets lag in their post-pandemic recovery, this may present catch-up opportunities, particularly in Europe and Japan. However, they remain exposed to supply chain and China risks given their large manufacturing base.

China has been a focal point after introducing more stringent regulatory and credit policies. Though cautious, we believe Chinese equities remain investable and represent a strategic opportunity given the country’s size and continual growth, its growing percentage of corporate revenues and its share of global trade.

Fixed Income: Rate Hikes Ahead?

As the Fed continues to remove its emergency policy measures heading into 2022 and markets price in potential rate hikes, yields could trend higher. Any increase in yields may be further supported by the economy moving past the “growth scare” that weighed on markets in the second half of 2021.

Alternatives: Expanding the Opportunity Set

As the traditional 60/40 portfolio faces potential challenges, the addition of alternatives should help lift long-term risk-adjusted returns, while providing diversification benefits. We believe hedge funds could serve as a complement to fixed income given the low nominal and negative real yield environment. We consider private equity to be a potential diversifier and return enhancer to public equity.

Cash: Maintaining A Portfolio Buffer 

We continue to believe cash should help dampen portfolio volatility during any risk-off episodes and allows our team to take advantage of any dislocations that may arise.

This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.


What’s Next for Fixed Income?

12.29.2021 Jeffrey S. MacDonald, Head of Fixed Income Strategies

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