What To Expect From Global Markets In 2022: Growth and the Rise of Small Caps

By Laura Sanchez

Investing.com - The year 2021 may have marked a real turning point in the markets. The coronavirus continues to spread via a new variant, while the threat of high inflation is increasing. Cryptocurrencies are back in the forefront of investors' minds, commodities have soared and currencies are facing volatility. Equity markets, on the other hand, have continued to rise, or at least the major indices.

2022 could mark a new market era: inflation, tightening of policies by central banks, etc. To prepare, Investing.com brings together their journalists and analysts from around the world to give you an overview of what's to come.

During the holiday period, we will be publishing our team's perspectives on the markets across the board, from currencies to stocks, from cryptocurrencies to commodities, from Europe to Asia to the Americas, and more.

In this article, we are going to focus on the experts' outlook for markets globally in 2022.

Global economic outlook: solid growth but with downside risks

Starting with economic forecasts, Giacomo Barisone, director of sovereign ratings at Scope Ratings, sees the global economy continuing its uneven recovery. The 2022 projections are solid, with growth of around 4.5%, but down from 5.8% in 2021 and with downside risks.

New variants of Covid-19, high inflation and the withdrawal of fiscal and monetary support pose risks to the recovery, Scope Ratings explains. "GDP growth will normalize somewhat next year, but will remain above trend. Scope forecasts growth of 3.5% in the United States and 4.4% in the Eurozone, 3.6% in Japan and 4.6% in the United Kingdom. China will experience growth closer to its long-term trend of 5%," says Barisone.

Main market risks: Covid-19 and inflation

Focusing on financial markets, Chris Iggo, CIO Core Investments of AXA Investment Managers, points to the new Covid variant as a continued key risk in 2022. "The beginning of the year is going to be complicated," warns the expert, who describes the current situation as "continuous confusion" with "contradictory signals."

"Over the past few months, the conversation in economic circles has revolved around reversing stimulus policies, and 2022 was shaping up to be the year of rate hikes and some fiscal tightening,” Iggo explains. "But the question now is: Should rates be raised to address inflation or should we remain in accommodative mode to offset any further negative impact from Covid?"

In this regard, the expert considers that, "the worst-case scenario is that central bankers think they need to crush inflation: real yields would increase and economic growth would respond negatively," although he adds: "This is a possible outcome, but we have to wait and see a little more about what the data brings."

Global companies - rotation to small caps

"2021 has been a great year for many companies on the stock market. Without needing to go too far, some of the biggest ones, such as Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) are closing the year near their all-time highs, pulling the market along with it and causing the main benchmark indices to continue their upward trend," explains Jerónimo Gómez, founder of invierteconsentido.com.

This expert warns that, at a technical level, some of these companies are already very extended in the short term. "They are trading at prices well above their 40-week averages, so they could correct over the next few months and remain sideways for some time. If so, these corrections could be reflected in the major indices such as the S&P 500 or the NASDAQ."

On the other hand, Gómez explains that “small cap companies are in a very different situation. Many of them, despite having strong business models, growing revenue, and being solidly profitable, have suffered a lot at a technical level during 2021 and could flourish in the stock market in the coming months. Whoever puts the focus on these companies during 2022 you will be able to find very good opportunities."

Ingrid Kukuljan, Head of Impact & Sustainability and a Lead Portfolio Manager at Federated Hermes, agrees, adding, "Global equity markets have experienced significant volatility in 2021, driven by price inflation, interest rate expectations and commodity shortages."

"While these trends can persist and lead to periods where market performance is driven by style factors, we remain focused on companies' fundamental values and their long-term prospects. Indeed, market volatility can offer us the opportunity to buy into companies exposed to impactful megatrends at attractive valuations," says Kukuljan.

US, Europe, China…

While the main investment bets are on Wall Street and technology companies, analysts believe that European equities can also offer good opportunities as part of a diversified portfolio, especially depending on one’s investing style and risk tolerance.

Schroders also wants to take a special look at China. "Asian equities (excluding Japan) had a choppy 2021. Chinese equities, in particular, faced a number of headwinds and their effects are likely to extend into 2022." explain Robin Parbrook and Toby Hudson, co-head of Asian equity alternative investments and the manager's Asian ex-Japan equity investment manager, respectively.

For these experts, China still has the right ingredients for strong growth in certain segments of the economy. "The problem we see is the increasing prominence of SOEs or state regulation in most of the country's key sectors. Even those that are not dominated by state-owned enterprises - such as the Internet sector - are forced to accept a much greater degree of state involvement in their operations," they conclude.

Read also: Can Chinese Stocks Rebound in 2022?

See our full outlook series here.