The Year Ahead

Posted on: November 24, 2021

2021 was a year of robust recovery.   At time of writing, all developed market equity indices are up significantly – well into the double digits.  Bond markets have fared less well in the face of low interest rates and inflation expectations.

BMO Economics and our Chief Investment Strategist Brian Belski expect more of the same, albeit more muted.

On the market front

Both Canadian and U.S. equity markets are forecasted to have positive, but less robust, returns in 2022.  Monetary stimulus will continue to be a tailwind, but less so.  Year-over-year corporate earnings growth likely peaked in Q2 2021 and is forecasted to be firmly positive next year.   Expansion of stock valuation multiples won’t likely be a market driver.  We are likely to see froth come out of some of the most exuberant parts of the market (unprofitable tech and meme stocks) as the market grapples with the potential for higher interest rates.

In Canada
Our Strategy team believes Canadian equities can achieve near double-digit growth in 2022.  They are forecasting new all-time highs at year-end:


In the U.S.
Similarly, they expect positive results in the US and forecast low double-digit price appreciation from current levels:

On the economic front

In Canada & the U.S.
Both countries are following a similar trajectory, so we’ll cover them together.  BMO Economics currently forecasts GDP growth of 4.3% for Canada and 3.5% for the U.S. in 2022.  Down from last year but well above long-term averages.



Canadian income growth is very robust.  Growth in disposable income is poised to add to the pile of excess savings that Canadians are holding.  BMO Economics continues to believe that this “wall of wealth” will boost spending as Canadians are more comfortable getting out and travelling.  



The U.S. is also seeing robust job growth, healthy wage gains, and a high level of savings (like Canada). 



Recent gauges of consumer confidence (per the University of Michigan’s polling) sits at a decade low.

The US had a more uneven recovery with a large dispersion between states and industries.  Also, those most hurt by COVID are likely feeling the pinch from inflation as income support fades. 



With the recently passed $1 trillion infrastructure bill and a social spending bill being worked out, there should still be plenty of fiscal stimulus on the horizon. It will take at least until 2023 for the effects of this stimulus to feed through the economy.

Considerations for 2022

After the economic rout of 2020, we now have savings that are well above norms and demand so strong that it is stressing global supply chains.  Much has changed in a year.

Supply Issues
There is much talk of stress on global supply chains.  Consumers have felt this personally with shipping delays and inflated prices.   The one-two punch of a global trade war and COVID-19 has exposed the cracks in a system that was dependent on just-in-time access to goods.  Locally, the recent devastation in BC (our hearts go out to those who have been displaced) has further complicated lines of distribution.

An emerging solution is onshoring.  Many companies are considering or are bringing production back to North America, and this has amplified current supply struggles.


Onshoring does pose challenges and retooling supply chains will not happen overnight.  But our strategists expect it to generate better operating efficiencies, and more consistent growth expectations, from North American companies going forward.
 
Inflation
Much like previous runs on consumer staples during times of worry, it is human nature to stock up on something that may be in short supply.  Brian and our team think this is happening on a global scale and that companies are stockpiling in the face of these concerns.  We had more than a few business owner clients confirm they are seeing elevated orders due to supply chain fears, pulling forward demand.

Based on their research and inflation forecasts, the strategy team thinks year-over-year inflation may have peaked.

As Brian puts it – “It is not ‘if’, but ‘when’, the bottlenecks transition from excess demand to oversupply.”  In the meantime, we need to be mindful of how asset classes tend to perform in periods of inflation.
 


















BMO Economics research has shown that equities are resilient during these periods.  Especially those high-quality dividend stocks that can pass most wage and cost increases to customers.  Interestingly, Canadian stocks are more exposed to cyclical industries than their U.S. counterparts, and this tends to provide additional support in periods of inflation. 

Real assets and commodities also tend to be a good hedge, while bonds may continue to underperform.  Remembering that diversification is the only free lunch in investing, and fixed income will still play a role.
 
Conclusion

BMO’s strategy team expects higher equities next year and our Economics team expects solid growth albeit more muted than what we saw in 2021. We know that year-ahead forecasts will be challenged, and that growth never happens in a straight line.  

With this as a foundation, we know that investors who cope with uncertainty can continue to meet their long-term financial goals.  We’re happy to support clients through whatever 2022 brings. 

We hope you have enjoyable holidays with your friends and family.  Best wishes for a Happy and Prosperous New Year from our family to yours.







The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of BMO Nesbitt Burns Inc. ("BMO NBI"). Every effort has been made to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions that are accurate and complete. Information may be available to BMO NBI or its affiliates that is not reflected herein. However, neither the author nor BMO NBI makes any representation or warranty, express or implied, in respect thereof, takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. This report is not to be construed as an offer to sell or a solicitation for or an offer to buy any securities. BMO NBI, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. BMO NBI -will buy from or sell to customers securities of issuers mentioned herein on a principal basis. BMO NBI, its affiliates, officers, directors or employees may have a long or short position in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. BMO NBI or its affiliates may act as financial advisor and/or underwriter for the issuers mentioned herein and may receive remuneration for same. A significant lending relationship may exist between Bank of Montreal, or its affiliates, and certain of the issuers mentioned herein. BMO NBI is a wholly owned subsidiary of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Nesbitt Burns Corp. Member-Canadian Investor Protection Fund.

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