Market Compass January 2022
- Despite risks from Omicron, we retain a positive view on the economic recovery. Vaccines and new drugs will help the economy normalise in 2022.
- Yet the (cautious) policy support removal and stretched valuation will dramatically cut future (beta) returns. The diversification benefit is also set to fall as policy normalises and volatility will be higher.
- Risks are skewed towards more hawkish policy. We expect longdated bond yields to rise, yet debt sustainability and financial stability risks will cap them. Credit will beat risk-free bonds again. We predict positive, yet lower and more volatile equity returns.
- The three main risks lie in a policy mistake causing financial havoc, a disorderly energy transition seeing a surge in selected commodity prices and a nasty variant escaping vaccine protection.