Thriving in a New Market Regime

We are entering a new market regime unlike any in the past half-century: We see another year of positive equity returns coupled with a down year for bonds. The powerful restart of economic activity will be delayed - but not derailed - due to new virus strains, in our view. Central banks will start to raise rates but remain more tolerant of inflation. We see inflation settling above pre-Covid trends – we’re going to be living with inflation. We favor equities over fixed income as a result, but have dialed back our risk-taking given the wide range of potential outcomes in 2022.

1. Living with inflation

We expect inflation to be persistent and settle above pre-Covid levels. We expect central banks to kick off rate hikes but remain more tolerant of price pressures, keeping real interest rates historically low and supportive of risk assets. Implication: We prefer equities over fixed income and remain overweight inflation-linked bonds.

2. Cutting through confusion

A unique mix of events – the restart, new virus strains, supply-driven inflation and new central bank frameworks – could cause markets and policymakers to misread inflation. We keep the big picture in mind but acknowledge risks – to the upside and downside - around our core view. Implication: We trim risk amid an unusually wide range of outcomes.

3. Navigating net zero

The journey for the world to achieve net-zero emissions by 2050 is happening now, and is part of the inflation story. We believe a smooth transition is the least inflationary outcome, yet even this still amounts to a supply shock playing out over decades. Implication: We favor developed market (DM) equities over emerging markets (EM).

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