What will 2022 bring to the market?

By Gargi Pal Chaudhuri

As the new year starts, I continue to wonder what’s to come. When it comes to the markets, we believe there are three key themes shaping the investment landscape in 2022 – inflation, the journey to net zero and equity allocations.

First, it’s expected that higher inflation will persist in 2022 and beyond.1?The continuation of powerful restart dynamics, more persistent supply chain challenges, strength in the all-important shelter inflation category of the Consumer Price Index (CPI) basket, and a savings- and wage-rich consumer will contribute to above-trend inflation.2?While we do not expect headline CPI inflation in excess of 6% to persist over the medium term, we see room for inflation to settle at a higher level than the pre-pandemic era of sub-2% core inflation even after pandemic reopening effects have run their course.3?For investors, this means positioning portfolios to live with inflation and considering a multi-asset framework to help mitigate its impacts.

Next, given the uncertainty of macro and thematic dynamics unfolding at an accelerated pace, we prefer a more selective approach to equity allocations. The evolution of the supply shock is key. Current supply constraints are among the most severe in decades. And it is the first time since the 1970s that inflation is supply-driven. But this is not the 1970s: activity is expanding briskly, not stagnating. We expect supply to gradually rise to meet demand given the strength of the economic restart and companies’ ability to adapt, as discussed in the?BlackRock Investment Institute’s year ahead piece. As higher supply and labor costs eat into post-pandemic margin expansion, the equity factors and sectors with the highest operating margins and lowest labor intensities stand to benefit.

Lastly, with the transition toward a net-zero global economy underway, risks and opportunities underpin a widening range of potential outcomes as investors grapple with how and how fast the world will decarbonize. The transition away from fossil fuels requires an estimated $50-100 trillion in capital investment to rebuild a net-zero global economy, cutting across the outlook for inflation, geopolitics, and policy.4

To learn more on these key themes, please read our full 2022 outlook and ETF investment guide.

1?BlackRock Investment Institute (BII), “Highlights of our 2022 outlook,” BII Weekly Commentary, December 13, 2021.

2 BlackRock, “Halloween and Christmas for Markets”, Rick Rieder, November 2021.

3?Bloomberg. As of November 26, 2021.

4?Intergovernmental Panel on Climate Change (IPCC), “Mitigation Pathways Compatible with 1.5°C in the Context of Sustainable Development,” in ‘An IPCC Special Report on the Impacts of Global Warming,’ 2018. For illustrative purposes only. There is no guarantee that any forecast made will come to pass.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this material is at the sole discretion of the viewer. Investing involves risk, including possible loss of principal.

Prepared by BlackRock Investments, LLC, member FINRA.

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