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

The year 2021 may have been a turning point for the markets. While a new version of the coronavirus is spreading, the fear of high inflation is growing. Cryptocurrencies have resurfaced in the thoughts of investors, commodities have risen, and currencies are experiencing volatility. On the other hand, equity markets, or at least the major indexes, have steadily increased.

2022 could mark a new market era: inflation, tightening of policies by central banks, etc. To help you prepare, Investing.com has gathered a team of journalists and analysts from all around the world to offer you a preview of what's to come.

Global economic outlook: solid growth but with downside risks

Starting with economic projections, Scope Ratings' director of sovereign ratings, Giacomo Barisone, believes the global economy will continue its patchy recovery. The growth forecast for 2022 is solid, at roughly 4.5 percent, down from 5.8 percent in 2021 and with negative risks.

According to Scope Ratings, new Covid-19 versions, excessive inflation, and the removal of fiscal and monetary support all pose dangers to the recovery. "Next year's GDP growth will slow somewhat, but it will still be above trend. According to Scope, growth in the United States will be 3.5 percent, 4.4 percent in the Eurozone, 3.6 percent in Japan, and 4.6 percent in the United Kingdom. China's growth will be closer to its long-term trend of 5 percent," Barisone said.

Main market risks: Covid-19 and inflation

In terms of financial markets, Chris Iggo, AXA Investment Managers' CIO Core Investments, sees the new Covid version as a major risk in 2022. "The start of the year will be difficult," says the expert, who described the current scenario as "constant confusion" with "contradictory indications."

"Reversing stimulus programs has been the topic of talk in economic circles for the past few months, and 2022 was shaping up to be the year of rate rises and some budgetary tightening," Iggo continues. "But the question today is whether rates should be hiked to combat inflation or should we stay accommodating to mitigate any future negative effects from Covid?"

In this regard, the expert believes that "the worst-case scenario is that central bankers believe they need to squash inflation: real rates would rise and economic growth would suffer," but adds, "This is a potential conclusion, but we have to wait and see what the data delivers."

"Many corporations on the stock market have had a terrific year in 2021. Without going into detail, some of the largest, such as Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT), and Alphabet Inc (NASDAQ:GOOGL) (NASDAQ:GOOG), are ending the year near all-time highs, pulling the market along with them and causing the main benchmark indices to continue their upward trend" Jerónimo Gómez, the founder of invierteconsentido.com, explains.

This expert warns that some of these firms are already overextended in the short term on a technical basis. "Because they are trading at levels substantially above their 40-week averages, they might decline in the coming months and trade sideways for a while." If that's the case, prominent indices like the S&P 500 and the NASDAQ might be affected."

"Small cap firms, on the other hand, are in a totally different scenario," Gómez argues. Many of them have suffered greatly on a technical level throughout 2021, while having good business plans, rising sales, and being consistently profitable, and might prosper in the stock market in the future months. During the year 2022, whoever focuses on these firms will be able to uncover excellent chances."

"Global equities markets have witnessed tremendous volatility in 2021, driven by price inflation, interest rate forecasts, and commodity shortages," says Ingrid Kukuljan, Head of Impact&Sustainability and a Lead Portfolio Manager at Federated Hermes.

"While these patterns may endure and lead to periods when market performance is influenced by fashion, we continue to focus on firms' fundamental characteristics and long-term prospects. Indeed, market instability can provide us with the chance to invest in firms that are exposed to significant megatrends at favorable prices "Kukuljan agrees.

While Wall Street and technology businesses are the most popular investments, analysts feel that European stocks may also provide strong returns as part of a diversified portfolio, depending on one's investing style and risk tolerance.

Schroders also intends to pay close attention to China. "2021 was a tumultuous year for Asian equities (excluding Japan). A number of headwinds hit Chinese stocks in particular, and their impacts are expected to last until 2022 "Robin Parbrook and Toby Hudson, the firm's Asian ex-Japan equity investment manager and co-head of Asian equity alternative investments, respectively, say.

According to these experts, China still possesses the essential ingredients for robust economic development in some sectors. "The issue we perceive is that SOEs or state regulation are becoming more prominent in most of the country's important industries. 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.