Where smart money will go in 2022

Where smart money will go in 2022

The investment environment since 2016 has been defined by low-interest rates and investment uncertainty. Investors have had two choices: stay in overpriced markets or take investment risks in the hope of major returns in an uncertain global market.

We believe that this will continue in 2022 and beyond and we expect to see a number of investment trends, including:

  • Geopolitical tensions will remain throughout 2022 and into 2023, but China’s economy will slow down more than is expected during this period
  • The U.S. Dollar is likely to gain against most currencies
  • Shorting volatility may become increasingly popular as investors try to generate income from balanced portfolios
  • Investment funds are likely to continue their search for yield through investment strategies.

Market Sectors

From early 2021 through early November, the price of West Texas Intermediate (WTI) crude oil rose about 80%.1 This increase can be attributed in part to the post-pandemic economic recovery and in part to growing supply constraints as the Biden administration implements an anti-oil program limiting U.S. oil exploration and production, a trend likely to continue into 2022.

Inflation is rising: the consumer price index for all urban consumers (CPI-U) for all items rose 6.2% in the 12 months through October 2021, up from 5.4% in the 12 months through September 2021. This was the largest 12-month increase since the period ended in November 1990.2 Gold reached a recent peak of over $2,000 per troy ounce in August 2020, but has traded in a range of about $1,800 since mid-2021.3 Expectations of future inflation rates will likely drive gold price swings in 2022.

Used cars have been a hot market, in part because of bottlenecks in the supply of semiconductor chips that have limited new car production. Record high prices for both new and used cars, as well as for rental cars, are likely to continue in 2023.

 The uptrend in commercial real estate investment should continue. In 2022, an investment totaling $812 billion is expected, up from a projected $636 billion in 2021 and a recent annual investment peak of about $810 billion around the 2020 time frame.4 Residential investment also will increase as homeowners take advantage of historically low mortgage rates to refinance home loans and free up cash for other investments.5 In spite of these trends, investors seeking quick returns on their money should remain wary of overpriced property deals that could lead to heavy losses.

Debt levels are high overall globally—global debt was 249% of GDP at the end of 2018, according to the International Monetary Fund (IMF).

Regulation and Federal Reserve Policy

The investment world of 2022 also will be shaped by developments beyond those affecting investment itself. For example, the investment environment of late 2018 and early 2019 was characterized by a resurgence in new regulation as well as high levels of volatility in financial markets. In November 2018, the Federal Reserve announced its first interest rate increase for the year, which it had delayed at several junctures that year given volatilities in market prices.6 The Fed has continued efforts to reduce portfolio holdings and raise rates further in 2019 – but it has done so cautiously and gradually due to market volatility and slowing global growth.

Meanwhile, banking regulators have started taking swifter action against institutions engaging in questionable investment practices or making risky bets with clients’ money.

Strategies to Help Maximize Income and Protect Principal

Against this backdrop, high net worth investors and their advisors are increasingly turning to investment strategies that can help protect principal and generate income. These may include:

  • Diversifying investment portfolios across a variety of asset classes, including cash equivalents, fixed income, equities, and alternative investments
  • Investing in securities with attractively high yields
  • Seeking opportunities in private equity and venture capital
  • Structuring investment portfolios to withstand market volatility

In the current environment, investors should also be mindful of potential risks, including liquidity risk (the inability to sell an investment quickly or at the desired price), credit risk (the possibility that a borrower will not repay a loan), and inflation risk (the likelihood that prices will rise).

Conclusion

Investment strategies for 2022 will not be investment strategies as we know them. Before investment portfolios can even be structured, the investment environment and investment considerations (i.e., risks and opportunities) must first be defined—and that may take some time.

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