Join us on 16 December when our chief economist Dr. Peter Westaway will be joined by colleagues from Vanguard’s Investment Strategy Group for a live presentation of the Vanguard economic and markets outlook 2022. We invite you to join us and find out more about our expectations for economies and markets for next year and beyond.
By Peter Westaway, chief economist and head of Investment Strategy Group, Vanguard Europe
The global economic recovery is set to continue in 2022, but the outlook for investors will depend on the decisions of global policymakers tasked with removing pandemic-driven policy support.
The summary of our economic and market outlook 2022 suggests the global economy will continue to grow, although at a slower pace, while policymakers must begin unwinding the extraordinary fiscal and monetary programmes implemented to support pandemic-hit economies – and do so without derailing the recovery.
Containing Covid-19 will remain key to the continued recovery, while the likely removal of policy support poses a new risk to financial markets relative to recent years. Taking those risks into account, our latest forecast suggests UK economic growth will reach about 5.5% in 2022, while growth figures for the euro area and the US are more likely to be closer to 4%. In China, where the national economy is suffering from a slowdown in the real estate sector, we expect lower growth – relative to recent history – of about 5%.
Unprecedented levels of fiscal and monetary support from governments and central banks since the pandemic hit have been highly effective. The wide-ranging support measures, from furlough schemes to bond-buying programmes, have created exceptionally accommodative financial conditions – especially given improved economic data.
At the same time, global supply chains face ongoing delays as manufacturers struggle with shortages in labour and materials. This has pushed up prices for a variety of products, with the most acute impact on consumer and industrial goods, resulting in higher inflation readings in most economies. Those supply-demand frictions are unlikely to disappear any time soon, leaving central bankers to strike a delicate balance between raising interest rates to keep a lid on inflation while also supporting a return to pre-Covid employment levels.
That’s why attention is firmly on policymakers in 2022 and why we think a policy misstep represents a key risk to investment markets. So, how do we think investment markets will behave over the coming year – and beyond?
We think central banks, including the Bank of England, European Central Bank and the Federal Reserve, will raise interest rates to combat inflation, meaning inflation should cool in 2022. We don’t think rising rates will hurt bond market total returns too much from here, given our inflation outlook and the demographic and technological trends that should keep long-term rates low.
Overall, we expect bond returns to be muted over the next decade. Using the Vanguard Capital Markets Model, which calculates our 10-year annualised return expectations1, we think both domestic and non-euro area bond markets will offer euro investors returns of between -0.5% and 0.5% – representing a downgrade on last year’s expectations (0.6% to 1.2%).
The removal of policy support and stretched valuations in some markets will provide a challenging backdrop for global equities, although 10-year annualised return projections are positive.
For euro investors, euro area equities are likely to return between 2.7% and 4.7%, and international equities (ex-euro area, unhedged) between 1.4% and 3.4%.
The challenging environment for equity investors shouldn’t deter investors from staying the course and sticking to the principles of good asset allocation across a globally diversified portfolio of stocks and bonds.
1 The projections and other information generated by the Vanguard Capital Markets Model® (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modelled asset class. Simulations as at 30 September 2021. Results from the model may vary with each use and over time.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.
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