#Market Strategy — 14.12.2021

2022 Global Outlook & Investment Themes: How to Navigate the Normalisation of Policy

Investment Navigator - Asia, New Year Edition (December 2021 & January 2022)

Prashant BHAYANI CIO Asia, Grace TAM Chief Investment Advisor, Hong Kong & Dannel LOW Investment Specialist at BNP Paribas Wealth Management

Key Summary

  • 2021 marks the year of the fastest post-recession global economic recovery in 80 years. The reflation and ESG themes are the winners of the year.
  • Omicron is a new uncertainty. However, in most scenarios, it could be a short-lived disruption as new vaccines would likely be available in a few months. Key will be transmissibility vs. hospitalisation trends and vaccine efficacy in coming weeks to monitor.  Too early to conclude.
  • Inflation will take the driver’s seat of financial markets in 2022. We expect three interest hikes by the Fed next year. Hence, inflation hedges are one of our key tactical investment themes next year.
  • We also see opportunities in rising capex in the public and private sectors as well as ESG, small companies and the Metaverse.

8 out of 10 Themes Work Well with Reflation & ESG Themes, the Winners of 2021

2021 marks the year of the fastest post-recession global economic recovery in 80 years, thanks to the rapid progress of the covid vaccine, accommodative monetary policy and fiscal spending. Also, global governments have aggressive reduction targets on carbon emissions. Hence, the reflation (energy, commodities, financials, real estate) and ESG (energy transition, governance, smart tech & food) themes outperformed this year. 

reflation esg

Will Omicron Drag Growth in 2022?

The impact of the Omicron variant on economic outlook depends on its transmissibility, severity of infection and vaccine efficacy which is still an unknown (as of writing). The best case scenario is the concerns prove largely overblown as the variant is not significantly more infectious or virulent and we may see a relief rally. The worst case scenario is a significant rise in cases and hospitalizations due to weaker vaccine efficacy, which lead to widespread lockdowns until a new vaccine can be distributed. In this case, we would see bigger drawdowns in risk assets and a fall in nominal yields. Nevertheless, even for the worst case scenario, it could be somewhat short-lived as pharmaceutical firms signal that the Omicron vaccine would be ready in 100 days. We could also see much fewer restrictions than in the first wave.

Inflation Takes the Driver’s Seat

Base effect, strong demand, supply chains disruptions, labour shortage and high commodity prices are all contributors to higher inflation.

Fed Chair Powell said recently that inflation is no longer “transitory”, paving the way for a faster tapering. “Stagflation” is not our base case scenario, though we do expect inflation to stay higher for longer. We expect the US CPI inflation to peak in 1Q at 6.8% and gradually edge down in the subsequent quarters. Crucially, it is back at central bank targets in 2023 for US, Europe, and the UK.

There are already signs suggesting that we are past the worst stage of supply disruptions as shipping queues and shipping costs are declining from the peak. Recent sharp fall in oil prices also improves the inflation outlook. 

We expect to see above-trend global growth at 4.8% in 2022, slower than this year’s 5.6% forecast but nevertheless a strong year. Hence, policy normalisation will be the norm for next year. The Fed is likely to accelerate tapering with the program ending in March 2022. We also move forward our first rate hike expectation from 4Q 2022 to mid-year, with two more rate hikes in September and December 2022. 

Read our last month's report - DON’T COP OUT: COP WINS!! Long Live the Energy Transition!

BNP Paribas CPI inflation forecasts

2022 Investment Themes

After a strong rally in equities, particularly Developed Markets, any major corrections triggered by concerns over Omicron, high inflation or the Fed’s potential faster pace of tightening are not surprising. We remain positive on risk assets, especially inflation hedges. “Riding a New Inflation Regime” is Theme 1 of our 5 key investment themes for 2022.

Both public and private sectors are increasing capex significantly with the former to stimulate economic recovery and to meet the aggressive net zero targets (e.g. Biden’s infrastructure bill and EU’s Recovery Fund etc), while the latter to upgrade technology for remote working and to resolve supply chains disruptions. This gives rise to plenty of interesting opportunities in areas such as health tech, infrastructure, smart technology, sustainable food and energy transition etc by “Identifying Winning Investments & Innovations” & “Repair, Reuse, Recycle” – Themes 2 & 3.    

Small caps tend to outperform large caps in the long run and especially during times of economic expansion, as where we are now. Also, large companies have seen actively acquiring smaller companies at a premium with the number of M&A deals reaching a record high. So, we do think “Small is (still) beautiful” – Theme 4.

In terms of mega-trends, Facebook changed its name to Meta and the term “Metaverse” is getting a big hit. In simple terms, it refers to the universe beyond the physical world i.e. the virtual world. Investors should grab the opportunities and be among the first to “Enter the Metaverse” – Theme 5.   


  • Omicron variant turns to be a major health crisis and hurt global growth significantly.
  • Major central banks tighten policy more than needed with a sharp rise in bond yields.
  • Inflation becomes more persistent with overheating job markets. 


  • Further deterioration in stock market breadth & a significant rise in high yield credit spreads could trigger a downgrade of global equities to neutral.
  • An inverted US yield curve could be a sign of stagflation or a looming recession.


  • Overall, we are positive on global equities on the back of the combination of a strong underlying earnings trend, our outlook for above-trend nominal economic growth in 2022 and heavily negative long-term real interest rates.
  • We particularly favour Eurozone, Japan and UK, as their valuations are reasonable and those markets have more exposure to value/cyclicals.
  • We are negative on US Treasuries as we see yields to move up further with our yield targets for 2-year at 1.25% and 10-year at 2.0% and hence, USD would stay strong.
  • We also see real assets, precious metals and green commodities as good inflation hedge. 


2022 investment themes

Get full details of our 2022 Investment Themes.

cio asset allocation strategy december 2021