IN FOCUS6-8 min read

Can equities continue to rise in 2022?

Our outlook for global growth and earnings suggests maintaining our exposure to shares. But returns may be lower, and there could well be more volatility, in the year ahead.



Caspar Rock
Chief Investment Officer

The discovery of the Omicron variant was an abrupt reminder that the pandemic is not over. It has not prompted us to lower our forecasts for economic and corporate earnings growth, both of which suggest maintaining exposure to equities. However, given the increased uncertainty, we do not view the brief sell–off it caused as enough of a buying opportunity.  

As I highlighted at the end of last quarter, we could be entering a more volatile period for markets – and not just because of continued risks from Covid. Inflation and a lower level of support from monetary policy act as headwinds, even if this has not yet been the case so far.

This uncertainty underscores the importance of diversification. Where appropriate, we maintain the “defensive ballast” within portfolios. It also highlights the appeal of longer–term themes – such as energy transition, technology and healthcare. As we saw last year, these sectors can continue to thrive even in the midst of a pandemic.

How we’re thinking about inflation

We expect inflation to moderate over the coming months, though it is unlikely to return to the sub–2% level that prevailed before the pandemic.

Equities should, in general, be able to perform well at this level of inflation. However, we will be focusing on pricing power to ensure that companies within our portfolios can protect margins from higher costs. Some sectors – such as technology – look better positioned than others.

Inflation could prove more of a headwind for government bonds, which could fall given their low starting yields and as investors appreciate that somewhat higher inflation is here to stay. There are selected areas of fixed income that continue to look attractive – such as Chinese bonds and asset–backed securities. However, we remain comfortable with our overweight position in alternatives at the expense of bonds. This includes exposure to market neutral strategies, which we look to generate attractive returns without taking significant bets on markets rising or falling.

A new risk for 2022: stagflation 

Though we do not expect it to materialise, the risk of “stagflation” – the combination of low or negative growth and high inflation – is rising, as the chart below shows. History suggests that both equities and government bonds struggle in this environment.

Our research points to three asset classes that are better positioned: inflation–linked government bonds, gold and other commodities. We have direct exposure to the first two of these, which should provide protection if we do head towards a stagflationary scenario. We should also benefit from our exposure to “real assets” – such as infrastructure and specialist property – that offer longer–dated, inflation–linked income. 

Within equities, stagflation can result in very different outcomes for different sectors. Materials and energy have tended to benefit from rising commodity prices. More defensive areas of the market, such as utilities and consumer staples, have also performed well as growth has slowed.

We will continue to monitor our equity exposure as the economic outlook evolves, ensuring we are well positioned to both deliver returns and mitigate risks for our clients.

Moving in the wrong direction: inflation forecasts rising, growth forecasts falling

3–month change in consensus inflation (CPI) and growth forecasts


Source: Bloomberg, Cazenove Capital. Data to 19th November

  2022 GDP forecast 2022 CPI forecast
US –0.4 0.7
UK –0.4 1.1
Europe –0.2 0.7
Japan 0.1 0.1
China –0.2 –0.1

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Caspar Rock
Chief Investment Officer