DWS expects strong growth and declining inflationary pressure in 2022

"The Corona crisis holds some lessons for us that will play a big role in the coming year and beyond," said Stefan Kreuzkamp, Chief Investment Officer DWS, at the DWS Market Outlook 2022 on November 23. Take the economic cycle, for example: unlike other economic downturns, he said, the Covid-19 pandemic only led to a very short-lived slump in economic activity.

The most controversial topic at present is probably the further development of inflation, Kreuzkamp conceded. Normally, inflation is triggered by increased demand. But this time the situation is different. Supply-side constraints due to supply chain disruptions have shifted the supply curve to the left. Added to this is pent-up demand. These two factors are largely responsible for the recent surprisingly strong rise in inflation figures. Looking ahead to the coming year, Kreuzkamp is nevertheless cautiously optimistic: "The supply chain problems should gradually recede in 2022, and with them inflation, although it should remain well above the level seen before the outbreak of the Covid-19 pandemic." Specifically, Kreuzkamp expects inflation to be 2.8 percent in the U.S., 2.6 percent in the eurozone and 2.2 percent in China.

Good growth prospects for 2022

Kreuzkamp assesses the growth prospects for the coming year as good, even if momentum is likely to slow. "We expect the eurozone economy to grow at 4.6 percent next year, slightly stronger than the U.S. (4.0 percent)." For China, Kreuzkamp expects growth to slow to 5.3 percent due to reforms.

No interest rate hikes in sight in the eurozone

The situation is also challenging for central banks, he said, and the road out of extremely loose monetary policy is long. In the U.S., the reduction of bond purchases should be completed by mid-2022, the DWS Chief Investment Officer expects. The first interest rate hike could come in the fourth quarter. In Europe, on the other hand, there is still no interest rate hike in sight, either next year or in 2023.

In terms of reducing CO2 emissions to net zero, a lot has happened since the outbreak of the Covid-19 pandemic. In the meantime, central banks have also focused on the issue. There is no alternative to tackling the issue of CO2 neutrality with the highest priority and it will lead to huge investments. However, the higher pricing of CO2 will also contribute to higher inflation rates in the longer term.

Kreuzkamp sees the wave of regulation in China and the accompanying unrest on the markets less as a threat than as a reform with a perfectly plausible background. Ultimately, the aim is to spread prosperity over more shoulders, for example, to make such elementary things as housing, education and healthcare more affordable.

Long-term positive outlook for China, India on the rise

For Asian equity markets, Sean Taylor, Chief Investment Officer Asia Pacific, sees a change in direction in the coming year. "After a very difficult 2021, in which Asian equity markets did not come close to keeping up with U.S. and European markets, things are looking much better for 2022," Taylor said. The poor performance in the current year is due to four factors: the tightening of monetary policy in China, new government regulations, a zero-tolerance policy on the Corona pandemic, and significantly lower fiscal support, he said. In 2022, Covid-19-related restrictions should slowly be rolled back, providing a tailwind for the economy, Taylor expects. He sees India as one of the region's most interesting countries for equity investment. "We see India as a clear winner in the reopening of Asia and one of the most interesting equity markets in Asia." Fiscal and labor market reforms, in particular, are likely to boost growth. The country has huge potential, especially in the technology sector, he said. "In the current year, the Indian startup scene has grown significantly, mobilizing $32 billion, 66 percent more capital than in 2020," Taylor said.

Taylor is also positive about Japan. The Japanese economy, and private consumption in particular, has long been on the back burner due to Corona restrictions, he said. That could change in 2022. For Chinese equities, he said, patience is probably needed. The lockdown measures could drag on until the end of the first quarter of 2022. Corporate earnings could be further revised downward. In the medium-term, the outlook is much better, he said. In the future, China will place more emphasis on the quality of growth than on quantity.

Equities – growth driver decarbonization

"Equities will continue to be among the highest-yielding investments in the coming year, but the price potential is significantly lower than in the current year," said Marcus Poppe, fund manager for global equities. DWS expects price increases in the mid-single digits, he said. "Valuations have probably peaked. Price performance in the coming year is likely to depend on the development of corporate earnings," Poppe said. The frequently addressed question of how European stocks will perform compared to U.S. stocks ultimately boils down to whether value or growth stocks have better prospects, he said. Europe has a much higher proportion of value stocks, while the U.S. is much better positioned in the technology sector, he said. "I don't see that investors' preference for growth stocks will fundamentally change," Poppe said. To be sure, European stocks are valued lower than U.S. stocks, he said. But that doesn't mean they have higher upside potential, he said. As long as real yields remain in negative territory, growth stocks should continue to outperform. If interest rates rise more sharply, on the other hand, value stocks that are not so sensitive to interest rates, such as industrial or auto stocks, could benefit.
Poppe sees decarbonization as a trend with great potential that extends far beyond the coming year. Clean technologies are just as important for industrials as for infrastructure companies and technology stocks.

Real estate – focus on affordable, sustainable housing and next gen prime office

"Real estate is a good way to hedge against rising inflation," said Jessica Hardman, Head of European Real Estate Portfolio Management. Many of the long-term leases are indexed to inflation, she said. "Real estate as an asset class remains attractive in an environment of real yields near or below zero," Hardman said. Two particularly promising trends: in the residential market, the trend toward affordable, sustainable housing; and in the office market, the trend toward modern, environmentally friendly offices that cater to the needs of the Next Generation (Next Gen Prime Office). A clear paradigm shift can be observed in office real estate, she said. On the one hand, demand has declined due to the increased trend toward home offices. On the other hand, demands on the quality of real estate have risen significantly. From a yield perspective, both areas are extremely attractive. In the area of sustainable, affordable housing, total returns of 5 to 6 percent per year are possible. This is 0.5 to 1.5 percentage points higher than the average returns achievable for residential properties. For office properties in the Next Gen Prime Office segment, the outlook is even somewhat better, with expected returns of 7 to 9 percent per year, 3.5 to 5.5 percentage points above the average returns achievable in the segment as a whole.

Multi-asset – in an inflationary environment, alternative investments deliver the best risk-return profiles

"Interest rate investments are visibly losing their role as a diversification tool for equity investments," said Björn Jesch, Global Head Multi Asset and Solutions. Their buffer function during equity market setbacks has shrunk significantly, he said. "We need to look for other asset classes to control risk in a portfolio and be ready for surprises." Depending on how growth and inflation perform, different asset classes play to their strengths, he said. As a general rule, he said: In times of rising inflation, value stocks and publicly traded infrastructure companies or commodities are advantageous because they have a high correlation to inflation. In contrast, growth stocks and listed real estate stocks are more likely to benefit when growth picks up and inflation declines. Liquid alternative investments such as listed infrastructure companies or commodities are particularly well suited to guard against surprisingly high inflation. Concludes the multi-asset expert: "The toolbox must be significantly expanded in order to respond well to the challenges that the markets may hold for investors."

For further information please contact:

Sabina Díaz Duque
+49 (0)69 910 14177
Sabina.diaz-duque@dws.com

Reimar Salzmann
+49 (0)69 910 14191
Reimar.salzmann@dws.com

About DWS Group

DWS Group (DWS) is one of the world's leading asset managers with EUR 880bn of assets under management (as of 30 September 2021). Building on more than 60 years of experience, it has a reputation for excellence in Germany, Europe, the Americas and Asia. DWS is recognized by clients globally as a trusted source for integrated investment solutions, stability and innovation across a full spectrum of investment disciplines.

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