GET AHEAD FOR THE YEAR AHEAD

investment outlook for 2022

The value of investments can go down as well as up, your capital is a risk.

1

What's going to affect you in the year ahead?

 

In 2021, there was a return to some form of normality across a vast majority of regions following successful vaccine roll-outs around the globe. However, along with the rise of a new variant in Omicron, inflation and supply chain shortages have come to dominate financial headlines. Increased levels of uncertainty due to Covid can raise the price of goods and create supply bottlenecks. So, what’s going to happen in 2022?

The cost of living is rising at the quickest rate in a decade

This is because of inflation, which is now hovering above 5% - more than double the Bank of England’s annual target.

So, from clothes shopping to eating out, things are getting more expensive: petrol is now at record highs, while energy costs have now surged beyond a 50% wholesale rise, and could rise further in 2022.

The cost of living is rising at the quickest rate in a decade

This is because of inflation, which is now hovering above 5% - more than double the Bank of England’s annual target.

So, from clothes shopping to eating out, things are getting more expensive: petrol is now at record highs, while energy costs have now surged beyond a 50% wholesale rise, and could rise further in 2022.

 

With interest rates below inflation the purchasing power of cash savings is declining

The return on your savings can rise with interest rates. However, these are currently less than the rate of inflation – by quite a lot. In 2021 the Bank of England took rates from 0.1% to 0.25%. While rates may rise again in 2022, these will likely remain within historic low levels – ie below 1% - well beneath inflation predictions of 5% or possibly more.

Current and predicted inflation and Bank of England interest rate. Source: Bloomberg/Coutts, January 2022

As we can see from the above chart, the consumer price index (CPI) – which represents inflation – is currently far above interest rates and predicted to stay many times higher before decreasing.

What does this mean for house prices and mortgages?

It’s good news for property owners, perhaps less so if you’re looking to buy. House prices continued to rise through 2021, up more than 11%, meaning average house prices in the UK have increased by over £30,000 since the pandemic struck.

This growth should continue into 2022, albeit at a lower rate and unevenly across the country. London has been the region with the lowest annual growth (2.8%) but prime central London properties are expected to grow substantially in 2022 after years of falling values.

Many experts expect an increase in the interest rate in 2022 which would impact those on variable rate mortgages. Although the majority of people should be insulated from this with over 80% of mortgages based on fixed rates.

Some good news: Wages and the recovery

The economic recovery is expected to continue into 2022, though with growth slowing to more normal levels. Nonetheless, UK GDP is on track to return to its pre-Covid levels in the first quarter of 2022 and as the recovery is set to continue through the year, wages should rise in line with inflation.

Some good news: Wages and the recovery

The economic recovery is expected to continue into 2022, though with growth slowing to more normal levels. Nonetheless, UK GDP is on track to return to its pre-Covid levels in the first quarter of 2022 and as the recovery is set to continue through the year, wages should rise in line with inflation.

digging deeper

Read our Asset Managers’ view on 2022 

2

Protecting your money and taking advantage of markets

 

The level of inflation may eat away the value of your savings. Therefore, in 2022, investing could be a good way to manage your wealth and take advantage of any post-pandemic recovery in the markets.

Why investing could be a good idea

  • In this historic low-rate era, investing in shares of companies or ‘equity’ could be seen as an investment in the potential for growth.

    The below chart shows the return of an index of global equity markets over the last 40 years. Of course, you shouldn’t rely on past performance as an indicator of future returns. Prices can go down as well as up and you may not get back the initial amount you invested. 

 

MSCI World Performance GBP

MSCI World in GBP terms. Chart shows value overtime of £100 invested in November 1981. Gross of any fees. Source: Bloomberg/Coutts. Past performance is not indicative of future performance.

  • By leaving your money invested over time any returns you make are reinvested in the market and these could multiply over time.
  • Equity markets can fall as well as rise. By holding an investment portfolio which is diversified with other assets such as bonds, you could balance the risk of a market downturn in other areas.

    The below chart shows the value of bonds compared to the value of equities over time, showing some value lost in one asset, can be made up for by another. 

 

bonds vs equities - 3 yr rolling returns

Rolling 3yr returns of UK equities compared to the returns of UK Gilts. Gross of fees. Source: Bloomberg/Coutts. Past performance is not indicative of future performance.

 

How to make the most of your investments

There are a number of ways to help the money you invest work hard to help you achieve your life goals.

Invest for a long time

The longer you are in the market, the more time you have to make the most of its performance and give your money the best chance to grow.

Invest regularly

By regularly adding to your investment portfolio, you’ll be able to closely manage your life goals and plan your finances in line with these over time.

a managed portfolio

Coutts asset managers constantly monitor markets worldwide and move portfolios accordingly, aiming to make sure they are well placed to take advantage of opportunities and to avoid undue risk. Diversification could help avoid risks without necessarily sacrificing future upside.

Invest with sustainability in mind

We all want to invest today for the world we want to live in tomorrow. Our equity investments are made within sustainability criteria to ensure that your investments are part of the solution and not part of the problem. This is profit with real purpose. We see long-term sustainable investing as a critical investment trend for this decade. As of 30 September 2021 our balanced discretionary portfolio has a carbon intensity that is 14% lower than its  benchmark (Coutts, Morningstar/MSCI, September 2021).

There are numerous options when it comes to investing depending on the stage you are at in your life, your level of knowledge and appetite for risk, and the amount you want to invest.

 

Speak to your private banker to get started on your investment path for 2022.

Already an investor? Speak to your private banker to explore further opportunities.

The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

 

3

our asset managers' outlook for 2022

 

Our award-winning Asset Management team detail the upcoming drivers of change that could influence investing, opportunities and risks in 2022.

Given the commitments made at COP26 in November, we are expecting governments in 2022 to come out with increased regulations and standards on net zero and emissions between now and 2025, impacting the valuation of companies and funds. It’s therefore more important than ever to incorporate risks and opportunities arising from climate change into the investment process when managing portfolios for the long term, and this is where Coutts is leading. ESG criteria is part of our DNA, rather than an opt-in for a small portion of our clients.

More broadly, the scope of asset management as an industry is enormous, with over $100 trillion assets under management. We’re expecting investors to step up more than ever before, enforcing votes on climate shareholder resolutions, as well as transparency around voting process and engagement. Other trends we expect are the mainstreaming of net zero carbon goals as best practice for businesses and an increased focus on biodiversity at a company level. In the UK, the Office for Environmental Protection (OEP) will become operational in early 2022, making sure the UK government and public authorities meet their long-term green commitments.

Another space to watch is the significant growth in green bonds supported by a diverse range of sectors, issuers and countries. The UK’s issuance of green gilts, in which Coutts invested £450 million, showed demand has not yet been satisfied. We’re also expecting an increase in sustainability bonds focusing not just on green themes, but on social characteristics.

How your investments make a difference

leading on responsible investing

Economic growth is expected to continue above its long-term trend, though, compared to 2021 at a more moderated pace in developed economies. Covid remains an important factor but research has evolved rapidly and allows the creation of brand-new vaccines quickly if need be. The supply chain issues that were well documented throughout 2021 should normalise in 2022, and we expect inflation to fall into year-end. It also looks like we will be able to get further beyond Covid as 2022 progresses. However, less accommodative monetary policy (less stimulus and upcoming rate hikes) means that the market will remain very sensitive to changes in interest rates. Against this monetary backdrop it is important to keep a long-term view on investment goals and stay invested as market volatility could remain elevated. Long term the transition to sustainable economies and future infrastructure programs should generate healthy economic growth this decade.

China – a country known for its significant economic growth over the past decade – is the one major region currently showing notable signs of slowdown. The Chinese authorities have resisted any major easing in monetary conditions thus far. However, in order to stabilise growth, this is likely to change. Regulatory pressures on the economic environment should gradually ease and monetary policy could become more stimulative. Chinese equity and broader emerging markets may therefore become more attractive in 2022.

In 2022 one sector where we see potential growth and value is in healthcare, which has attractive valuations and strong long-term fundamentals around an aging population and increased spending.

One of the main 2021 takeaways for everyone will be the rising cost of living, from petrol, to houses, to coffee. Increasingly, companies are signalling the passing of costs to consumers, driving inflation, which is likely to reach 5-7% in the UK and US.

Inflation will likely stay at elevated levels in early 2022 before gradually falling back towards year-end. Supply bottlenecks and energy prices should ease gradually, though inflationary pressures will exist in wage growth however and ESG (environmental, social and governance) and net zero policies may create costs which could offset some of the deflationary effects of new technologies. Nevertheless, we don’t think that inflation will become unanchored globally and rising prices can still be considered supportive of economic growth.

Rising inflation has seen markets begin to ‘price in’ interest rate hike expectations. The eventual pace of the US Federal Reserve’s ‘tightening’ of monetary policy by raising interest rates will be a key driver of asset markets in 2022 and 2023. Central banks will be cautious not to let bonds yields rise in an uncontrolled fashion however and any increase in bond yields should be gradual and limited (as inflation declines) in 2022. The UK, where inflation expectations are high compared to other G7 countries, is similarly expected to raise rates in 2022 but the economic backdrop is not as strong as in the US. In the Eurozone, the European Central Bank will be more hesitant to raise rates as it remains much further away than the Fed from its inflation targets over the past decade.

Despite being on track to show 2021’s strongest growth among the G7 economies, the UK faces stronger headwinds than its peers for 2022, with Brexit a compounding factor. The on-going tensions between the UK and several European countries, as well as some well publicised labour shortage issues in the UK, have served as a reminder that Brexit as an economic narrative did not end on the 31 of December 2020. Brexit can accentuate the issues of supply chain disruption and inflation in the short term and is probably one of the reasons why UK inflation expectations are higher than in other G7 countries. While the strength of the housing market and higher wages will help the UK economy continue to grow above trend in 2022, Brexit, expected tax rises and lingering consumer price inflation may make the Bank of England’s actions particularly difficult to anticipate, potentially with a knock-on effect in the price of sterling and gilts (UK government bonds).

Global politics remains a space that rewards vigilance over predictions when it comes to investing. Since 1939 we have held data on over 30 major geopolitical events. While the ability to exit the market just before a political led correction can avoid losses, on average, markets have been shown to be up by 15% within 12 months. Consequently, we maintain that a good approach is to be aware of the nature and financial impact of these events but to be ready to go against the noise and the crowd and buy into markets to make the most of the upside.

  • Given the commitments made at COP26 in November, we are expecting governments in 2022 to come out with increased regulations and standards on net zero and emissions between now and 2025, impacting the valuation of companies and funds. It’s therefore more important than ever to incorporate risks and opportunities arising from climate change into the investment process when managing portfolios for the long term, and this is where Coutts is leading. ESG criteria is part of our DNA, rather than an opt-in for a small portion of our clients.

    More broadly, the scope of asset management as an industry is enormous, with over $100 trillion assets under management. We’re expecting investors to step up more than ever before, enforcing votes on climate shareholder resolutions, as well as transparency around voting process and engagement. Other trends we expect are the mainstreaming of net zero carbon goals as best practice for businesses and an increased focus on biodiversity at a company level. In the UK, the Office for Environmental Protection (OEP) will become operational in early 2022, making sure the UK government and public authorities meet their long-term green commitments.

    Another space to watch is the significant growth in green bonds supported by a diverse range of sectors, issuers and countries. The UK’s issuance of green gilts, in which Coutts invested £450 million, showed demand has not yet been satisfied. We’re also expecting an increase in sustainability bonds focusing not just on green themes, but on social characteristics.

    How your investments make a difference

    leading on responsible investing

    next generation investing

    Our 2022 changes are equivalent to a carbon reduction of 32,000 tCO2. But what does that really mean?

  • Economic growth is expected to continue above its long-term trend, though, compared to 2021 at a more moderated pace in developed economies. Covid remains an important factor but research has evolved rapidly and allows the creation of brand-new vaccines quickly if need be. The supply chain issues that were well documented throughout 2021 should normalise in 2022, and we expect inflation to fall into year-end. It also looks like we will be able to get further beyond Covid as 2022 progresses. However, less accommodative monetary policy (less stimulus and upcoming rate hikes) means that the market will remain very sensitive to changes in interest rates. Against this monetary backdrop it is important to keep a long-term view on investment goals and stay invested as market volatility could remain elevated. Long term the transition to sustainable economies and future infrastructure programs should generate healthy economic growth this decade.

    China – a country known for its significant economic growth over the past decade – is the one major region currently showing notable signs of slowdown. The Chinese authorities have resisted any major easing in monetary conditions thus far. However, in order to stabilise growth, this is likely to change. Regulatory pressures on the economic environment should gradually ease and monetary policy could become more stimulative. Chinese equity and broader emerging markets may therefore become more attractive in 2022.

    In 2022 one sector where we see potential growth and value is in healthcare, which has attractive valuations and strong long-term fundamentals around an aging population and increased spending.

  • One of the main 2021 takeaways for everyone will be the rising cost of living, from petrol, to houses, to coffee. Increasingly, companies are signalling the passing of costs to consumers, driving inflation, which is likely to reach 5-7% in the UK and US.

    Inflation will likely stay at elevated levels in early 2022 before gradually falling back towards year-end. Supply bottlenecks and energy prices should ease gradually, though inflationary pressures will exist in wage growth however and ESG (environmental, social and governance) and net zero policies may create costs which could offset some of the deflationary effects of new technologies. Nevertheless, we don’t think that inflation will become unanchored globally and rising prices can still be considered supportive of economic growth.

  • Rising inflation has seen markets begin to ‘price in’ interest rate hike expectations. The eventual pace of the US Federal Reserve’s ‘tightening’ of monetary policy by raising interest rates will be a key driver of asset markets in 2022 and 2023. Central banks will be cautious not to let bonds yields rise in an uncontrolled fashion however and any increase in bond yields should be gradual and limited (as inflation declines) in 2022. The UK, where inflation expectations are high compared to other G7 countries, is similarly expected to raise rates in 2022 but the economic backdrop is not as strong as in the US. In the Eurozone, the European Central Bank will be more hesitant to raise rates as it remains much further away than the Fed from its inflation targets over the past decade.

  • Despite being on track to show 2021’s strongest growth among the G7 economies, the UK faces stronger headwinds than its peers for 2022, with Brexit a compounding factor. The on-going tensions between the UK and several European countries, as well as some well publicised labour shortage issues in the UK, have served as a reminder that Brexit as an economic narrative did not end on the 31 of December 2020. Brexit can accentuate the issues of supply chain disruption and inflation in the short term and is probably one of the reasons why UK inflation expectations are higher than in other G7 countries. While the strength of the housing market and higher wages will help the UK economy continue to grow above trend in 2022, Brexit, expected tax rises and lingering consumer price inflation may make the Bank of England’s actions particularly difficult to anticipate, potentially with a knock-on effect in the price of sterling and gilts (UK government bonds).

    Global politics remains a space that rewards vigilance over predictions when it comes to investing. Since 1939 we have held data on over 30 major geopolitical events. While the ability to exit the market just before a political led correction can avoid losses, on average, markets have been shown to be up by 15% within 12 months. Consequently, we maintain that a good approach is to be aware of the nature and financial impact of these events but to be ready to go against the noise and the crowd and buy into markets to make the most of the upside.

4

how we're positioned

 

A breakdown of Coutts Asset Allocations by Portfolio - all charts as of December 2021 and subject to change. The examples presented are for illustrative purposes only. Final Tactical Asset Allocation may vary depending on individual suitability and investment objectives with individual clients. As a result of rounding, figures may not add up to 100%.

asset allocation

uk

Defensive

balanced

growth

equity growth

global

Defensive

balanced

growth

sterling

Defensive

balanced

growth