Cross assets analysis - positive relative equity returns ahead, but lower and more volatile

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The recovery is alive and well, and growth will still be above potential next year. Yet global growth will be slower in 2022 than 2021 (4.2% vs. 5.8%). Also earnings momentum will decelerate from the stellar pace of the past quarters, even if our forecasts are for a still solid growth (+10% in 2022).
Market Commentary

Highlights:

  • We have updated our analysis on US relative asset performance based on historical patterns (see Core Matters: Relative asset performance, August 11, 2021).
  • While we expect the global economy to stay firmly in “expansion”, according to our Margin indicator the US is approaching a “slowdown” phase of the business cycle, in which historically US Equity still outperforms long- and short-term government bonds, IG and HY.
  • Should nominal 10-year US government bond yields rise moderately (+50bp from current level), historical patterns suggest that the return of US Equity would still be higher than the one of 10-year Treasury bond, IG and HY, but the outperformance would be lower than before. The pain threshold should be +100bp for equity vs IG and +150bp for equity vs Treasury bonds and HY.
  • Should real 10-year US government bond yields (nominal minus breakeven inflation) move in a range of +/- 50 bp from current level, the return of US Equity vs 10-year Treasury bond, IG and HY could stay positive. The pain threshold should be above 50bp for equity vs IG, +150 for equity vs government bond and +200 bp for equity vs HY.
  • The realized bond volatility seen in the last months is potentially harmful to equity and could trigger larger than average drawdowns. We expect positive but lower and more volatile relative equity returns in 2022.

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