Waterloo Capital 2022 Market Outlooks

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2022 will be a defining point in the current market cycle. The world is finally moving past the effects of covid and entering a normalization phase for economic growth and monetary policies. We are moving deeper into the middle of the cycle, and the removal of policy support will leave both the stock and bond markets on their own for the first time in years.

Our themes for this year include higher volatility, the Fed, inflation, and...

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Our themes this year revolve around the changing economic, monetary, and policy landscapes. The economy is growing steadily, but the market cycle has been accelerated by unprecedented fiscal and monetary policy support. As we move deeper into mid-cycle territory we are focusing on four key themes that will be driving market risk and returns this year.

Markets: Volatility Loves Uncertainty

The Fed: Threading the...

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The early cycle snapback from pandemic lows could be nearing an end as the economy moves into the mid- to late-cycle phases of the market cycle. The back end of market cycles are characterized by weaker breadth and higher volatility. In this environment, tactical allocations and security selection will be more important to improving outcomes than passive index exposure. The TINA environment is still intact, but inflation and rising interest...

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High exposure to value oriented, defensive, and inflation beneficiary positions provide Europe with an attractive backdrop. Additionally, ongoing monetary and fiscal policy support will help boost sentiment and provide some volatility protection. These positives could be overrun by the dislocations in local European economies and a slowdown in global growth prospects later in the year. We think both the upside and downside potential are lower...

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Sitting firmly in the global value category the UK offers intriguing exposure to financial, cyclical, and defensive positions at historically low relative valuations. These factors also tend to perform well during mid-cycle expansions. Political uncertainty and a habit of aggressive covid lockdowns have turned many investors away from the relatively smaller equity market. Brexit uncertainty is still an issue which will need to be watched...

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Japan is likely to see a re-acceleration in domestic activity this year, but we find the outlook for Japanese equities to be too reliant on assumptions of a reversal in consumer activity and sustainable strength in foreign demand to get too excited about early 2022 prospects. Second half prospects may improve as stimulus measures make their way through the economy. Fiscal and monetary policies remain highly accommodative and should help boost...

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Emerging markets (EM) are facing more headwinds than developed markets. If we are correct in our view of a mid-cycle slowdown, emerging markets are unlikely to post outsized relative returns due to weaker support from developed market demand. The slowdown in China, hawkish central bank activity, inflation, rising US interest rates and a stronger US dollar, along with precarious risk sentiment, are all hurdles facing emerging market economies....

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The leader out of the covid bottom has fallen towards the back of the pack and the prospects for a sustainable reversal have been slow to develop. China is facing threats of destabilization in the real estate market, its key positioning in the global supply chain, and government intervention in many of its fastest growing industries. Growth is likely to remain below target this year as China keeps its "covid zero" policies in place leading to...

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Bonds are facing a near perfect storm of obstacles this year. Excessive valuations, central banks raising rates, higher inflation, and uncertainty about the strength of the economy without covid subsidies. The return prospects for traditional bond index exposure are low this year. Total returns are likely to be flat to negative. Real returns, which account for inflation, will be worse. Investors will benefit from lowering duration exposure...

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International bonds are facing many of the same headwinds we are seeing in the US. A rebound in economic activity and a tight labor market are pushing inflation higher and many central banks are scrambling to adjust policies. Intentional markets are beginning to show some divergences in policy paths. The European Central Banks (ECB) is holding rates near 0%, effectively keeping many eurozone countries' yields in negative territory, and the...

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For the first time in a decade, commodities outperformed the S&P 500 in 2021 and notched their best year since 2009. Strong near-term demand and lengthier timelines to increase production should keep the asset class climbing higher next year. The mismatch in demand and production expectations can lead to feedback loops in real assets where higher prices beget higher prices until the supply and demand realign. Overall, we favor oil given...

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Nearly $3.5 trillion in dry powder has accumulated in the alternative investment ecosystem. Demand will continue to grow, and the asset class is poised for another bullish year of investment and exit activity. Corporate activity will also lead to higher M&A deal flow. In private equity focus on managers targeting mid-market opportunities where sponsors have more control over terms and deeper cooperation with portfolio companies. Private...

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