More upside for equities in 2022 and beyond

A better-than-expected 2021 could pave the way for equities growth into 2023, says Lenny McLoughlin, senior investment strategist for Irish Life Investment Managers.

McLoughlin said there is further upside in global equities markets even after stellar aggregate earnings growth this year.

“Equities are supported by the strong fundamental growth backdrop that we see, which should lead to earnings growth somewhere in the region of 7% next year, and 9% the following year,” he said, adding that conditions justify equities trading on a 12-month P-E multiple of about 18 times.

“Within a balanced portfolio we still like equities and would suggest people have a high weight in equities,” he said.

The year was also good for global corporate earnings, forecasts of which were raised mid-year to 52% growth, double the original expectation of 26%. Global GDP growth overall is expected to come in at just below 6%, up from the expected 5%.

Within bonds, he believes much of the upward movement in yields is done, but he still expects to see modest increases in yields over the course of 2022.

“In relation to the U.S. 10-year bond, currently that yield is about 140. We think that yield can get about 180 over the course of the next 12 months,” McLoughlin said.

The catalyst for that would be reduced levels of policy accommodation from the Fed and other central banks over the course of the next year.

He is particularly bullish on global corporate bonds, which currently yield about 4.3%, and some emerging market debt, which can yield as much as 5.6%.

Market risks in 2022

McLoughlin said the biggest concern on the horizon is persistent inflation. If consumer demand continues alongside Covid-related slowdowns and supply chain issues, inflation will threaten global growth, impact bond yields and undermine the relative valuation case for equities.

His base case, however, is that headline inflation will come down from the levels hit over the last 15 months. Disinflationary forces like technology and automation remain in place, he said, and there are tentative signs that supply chain bottlenecks are beginning to ease. Purchasing managers’ indexes suggest that delivery times are beginning to improve, hard-pressed industries such as automobile production are ramping up once again, and freight rates between China and the U.S. have fallen about 25% over past six or so weeks.

“In terms of where inflation is likely to get to, that 6.2% year-on-year figure that we have in the States at the moment, we think by the end of next year that will have fallen to just over 3%,” he said. “In Canada, we think that 4.7% can fall to 2% at the end of next year. And in Europe, we think the 4.9% can fall to less than 2%.”

The post-Covid normal

McLoughlin believes the efficacy of Covid vaccines and new antiviral treatments also promise a return to normal life over the course of 2022.

“Omicron was a hit to that return back toward normal life, but our sense is that given the levels of efficacy we’ve seen in vaccines, the antiviral treatments, and the better news around omicron, we do think the path toward normality continues and will be even more evident as we move into 2022,” he said.

He believes acceptance of vaccines will increase through 2022, owing to increasing vaccine supply, ongoing fears about new variants, and increased restrictions on the unvaccinated.

“That should improve the path back towards normalization for the global economy,” he said.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.