Despite near-historic market volatility, 2021 brought great reprieve to investors globally with markets generating double-digit returns even in the face of intense uncertainty over the pandemic, historically high inflation, and continued supply chain disruptions. But what will 2022 hold? If strategists at major investment banks are to be believed, it means another great year for investors— especially those with bets on China. To see their projections, check out our graphic below:
China leads the pack with market estimates from Goldman Sachs and Morgan Stanley implying a 14.6% annual return. This is largely driven by the market’s recovery from the major correction it experienced in spring 2021 following Beijing’s crackdown on the education and technology sectors as well as the tightening of monetary policy by the People’s Bank of China (PBOC). Markets got additional support in mid-December when the PBOC began to relax policy and cut banks’ reserve requirement ratio. This freed some $188 billion in liquidity and signified Beijing’s increased focus on supporting growth. Nevertheless, even with a relatively friendly policy environment and sufficient liquidity, market risks such as repeated COVID outbreaks, continued power shortages, and production limits on energy-intensive sectors will continue to weigh on investors’ minds.
Though estimated to grow slower than China in 2022, consensus projections from 20 investment banks suggest the US market is on track to double in value from where it stood in 2019— in sharp contrast with other developed markets such as the UK which is projected to grow just 15% over the same time period. In the US, 2022 growth will largely be driven by a continued rise in profits as companies are able to expand margins despite rising input cost and supply chain challenges. US equities will be further supported by a continued recovery in the labor market, consumers spending the savings they have accumulated throughout COVID, and the resolution of supply chain disruptions. However, the Federal Reserve will try to manage and moderate this growth through interest rate hikes which would help shift capital back into bond markets.
All of this should be taken with a grain of salt. COVID is still dictating the economic trajectory and the uncertainty brought about by the virus has caused these same experts to wildly miss the mark on everything from unemployment to inflation. The only thing that is certain is that 2022 will not be as smooth as the graphic implies.
Niels Graham is an Assistant Director with the GeoEconomics Center
At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.