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For today’s Soundbites, we review 2021 with Lenny McLoughlin, chief investment strategist with Irish Life Investment Managers. We spoke about supply chain issues, inflation, and the impacts of Covid. And we started by asking him to characterize the financial story of 2021.

Lenny McLoughlin (LM): When we look at 2021, it was a continuation of the reflation trade that began in 2020. U.S. fiscal spending increased substantially over the course of the year. We also saw increased levels of fiscal spending in Europe and other parts of world. And with that, what we saw was upward revisions to growth forecasts. Global growth was expected to be somewhere in the region of 5%. It will actually turn out to be just below 6%. So, a very, very strong fundamental backdrop for equity markets in particular.

How the ongoing Covid saga could play out in 2022.

LM: Vaccines have proven to be very effective. In terms of the take-up of vaccines, it has varied across the world. In Europe, vaccine take up has been quite high. If we look at emerging markets or Asia, where vaccination rates have been low, we’ve seen a significant acceleration in vaccination rates there recently. And it looks like we could get vaccination rates up towards 75% and beyond across Asia and E.M. markets by the end of this year. Our sense is given the levels of efficacy we’ve seen in vaccines, the antiviral treatments, and the better news around omicron, we do think that that path toward normality continues and will be even more evident as we move into 2022.

On the resilience of inflation.

LM: We’ve obviously moved to very high levels of inflation over the last 12 to 15 months for a number of reasons. One is base effects, pent-up demand that we’ve seen as economies have reopened and supply bottlenecks that we’ve seen in the global economy. Now, while inflation has risen sharply, we believe the disinflationary forces that have been there for a number of years still remain in place, and we’re beginning to see tentative signs of those supply bottlenecks beginning to ease. 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%. 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%.

What sectors and regions excelled in 2021.

LM: When we look at equity markets, the U.S. did particularly well this year. It’s up about 21% year to date. We also saw Canada perform quite well, up a single level of magnitude to the U.S. this year, up around 21-22%. Another surprise, regionally, within equity markets, has been Europe, which is up about 17 or 18% year to date. In terms of bond markets, we did see bond markets sell off this year. The one area that actually performed quite well was global high-yield corporate bonds. Commodities also performed very well this year. We’ve seen commodities rise 44% year to date, with oil up about 66% year to date. In terms of sectors, energy did quite well, it was up about 36%. Technology stocks also fared very well, up over 20%, Financial is another sector which did quite well this year. And real estate also did well, rising about 15 or 16% year to date.

And finally, what looks good as we move into 2022?

LM: Despite the gains that you’ve seen in equity markets this year, we still see further upside in global equity markets. Equities, we believe, are supported by that 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, which follows very, very strong earnings growth of 52% in 2021. Equities continue to look very attractive on a relative valuation basis against other assets, particularly bonds and cash. Within bonds, we still see higher yields over the course of 2022. In terms of interest rate rises, while some central banks could well raise rates over the course of 2022, we think rates will remain relatively low. So, limited increases in official interest rates will also limit or cap the extent to which bond yields are likely to rise in 2022. Within the fixed income market what we do continue to like is those areas where you get a yield pickup, such as emerging market debt, currently yielding about 5.6%.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life. Our thanks again to Lenny McLoughlin of Irish Life Investment Managers.

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