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December 9, 2021
4 mins

Letter from David Bailin

December 9, 2021
4 mins
David Bailin
Chief Investment Officer & Head of Citi Global Wealth Investments
David Bailin image

In the weeks leading up to the release of Outlook 2022, we all learned that the pandemic will persist well into 2022.

The hope that 8 billion vaccinations and widespread population exposure to the Delta variant would be sufficient to subdue COVID turned out to be false when Omicron struck. At the same time, my team and I became convinced that, for 2022 and 2023, the global economic recovery that is now underway will endure and ultimately outlast the pandemic – see Sustaining returns: Moderate growth ahead. In short, we believe the world economy and equity markets have not peaked and have room to grow.

Our confidence here speaks to the brilliant adaptability of industry and individuals, paired with the power of technology and timely government action. Digital everything continues to substitute for being there in person. Governments’ fiscal spending and central bank liquidity continue to buoy consumers and businesses.

And people have returned to many social and consumer activities to a greater degree than one might have expected. The value of these actions is reflected in markets. Earnings for the S&P 500 exceeded their 2019 levels by 26% in 2021. US and global equity markets ended November 2021 42% and 29% above their December 2019 levels. The Nasdaq Composite (Technology) Index was 73% above year-end 2019.

That said, we do not believe there will be a rapid return to normal anytime soon. In fact, there is a new normal evolving now that is central to our positive economic outlook. This new normal consists of the establishment of a data-enabled, decentralized, flexible and highly efficient economic order. Within it, the accelerated adoption of technology across every industry and every business is a necessity.

From online medicine to virtual fitness classes, from digital assets to the metaverse, a parallel digital dimension has been added to our lives forever. Underpinning all of this is capital. Early and late-stage venture investments in the first three quarters of 2021 surpassed $283 billion in the US alone and there were more than $510 billion1 in exits, exceeding any prior year by a long shot.

From alternative energy to electric trucks, from fintech to 5G, we see the future of innovation and investment intersecting in ways unimaginable just two decades ago. This new normal is based on many of Global Wealth Management's Unstoppable trends, as we discuss later in this report. It turns out that the new normal is totally investable. We believe exposing portfolios to these trends is the way to their longevity.

Advice to action

Clients who have followed the guidance provided by Citi Global Wealth during the pandemic period have seen the value of their portfolios rise. Our timely equity overweights, specific allocations to small caps, emerging markets and real estate, and willingness to trust the financial data and look closely at the unfolding medical facts have enabled us to make choices about where to deploy capital and when. We call this advice to action, where our views are carefully vetted and then reflected in the composition of our discretionary and advisory client portfolios.

There is no better time than today to revisit our guidance.

There are many worries on investors’ minds. The distortions caused by COVID to supply chains, labor markets, input prices and inflation are undermining consumer confidence. The response by the US Federal Reserve has become muddled, as a decision to fight inflation through higher rates and lower liquidity would slow the economy before it has healed.

The rise of the Omicron variant is also an obvious big worry, with its winter appearance intensifying an already bad COVID season around the globe. And on top of all this is the expected slowing of the economy after a burst of growth unseen since just after World War II. These factors and circumstances have made people doubt the resilience of the global economy. That has sent tremors across the financial markets as we approach 2022.

This is where having a clear and objective mind becomes critical. So, here are our Outlook 2022 expectations in short form:

  • Global GDP growth will be solid. The world’s factories are catching up to demand and we expect real GDP to slow to 3.8% in 2022 from 5.6% in 2021, when the world was rebounding from a depressed 2020.
  • Inflation is likely to retreat to tolerable levels in 2022. So many of the current distortions are not permanent events. We expect trend inflation will be 2.5% in the coming decade.
  • Interest rates will remain low or negative. We expect US cash yields to average -1.6% less than inflation in the coming decade.
  • Corporate earnings per share are going to continue to rise, by a probable 7% in both 2022 and 2023, even with a new US corporate minimum tax. CEOs remain confident.
  • The impacts from COVID will gradually abate as more exposure, vaccines and effective treatments diminish the impact of the disease.

Given these views, we are making some substantial changes to portfolio allocations and portfolio content.

  • Our allocations have evolved in 2021 toward less cyclical, higher quality assets – see Our positioning. In 2022, we will continue to emphasize quality in portfolios, identifying stronger companies with leading positions in growing industries – see Long-term leaders.
  • We are also emphasizing dividend growth strategies in both US and non-US portfolios – see Why dividends matter more today than ever
  • Industry leading firms in ecular growth industries combined with quality income generating equities have the potential to outperform as the initial rebound trades fade into memory – see Long-term leaders.
  • We will be leaning toward equities relative to fixed income as 2022 begins. Accepting negative real returns from many bonds seems a poor choice.
  • Alternative investments should shine relative to traditional investments, if our strategic return estimates prove right – see The long-term return outlook for major asset classes has changed. It is better to be a borrower when rates are low, favoring potential private equity, real estate, venture and hedge fund opportunities.

Finally, diversification remains a critical emphasis, as it is historically the way to reduce portfolio volatility. Market timing should be avoided.

The cash thief returns

In Outlook 2022, you will once again be reminded that the cash thief is on the prowl. While the effect of negative real interest rates may appear mild, cash will be a bigger drag on portfolio returns than in many decades. We estimate than in just ten years’ time, every dollar that has remained uninvested have seen its purchasing power shrink to 80 cents. Nonetheless, many sophisticated investors have 20% or more in cash, believing that to be a hedge, safety net or pool to be invested later, at the right time. None of this is true.

Cash is not a safe investment, given that inflation and taxes can destroy its value. Instead, we urge investors to maintain a fully diversified, global portfolio. With 86% of all months since 1945 generating positive equity returns, history has shown that it is safer to grow wealth than hold cash.

Final thought

There have been no dull days these past two years. If there is a silver lining to living through a pandemic, it is having been able to devote even more time to engaging with you, all thanks to the latest digital technologies. And you have responded by investing more of your time and capital with Citi Global Wealth than ever before.

Our record-setting year would not have been possible without CGW colleagues from across the globe, whose dedication, professionalism and insights have provided the fuel for our shared progress with you. We wish you all a bright 2022 and beyond. Let’s endure and thrive together.


Outlook 2022

In Outlook 2022 we highlight asset classes and regions that may lead the way in 2022 and beyond.

Find out more
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