After another great year for equities, danger lingers

In response to the coronavirus, the Fed created trillions of dollars out of thin air, Congress handed out trillions more, and the pandemic offered a tacit guarantee that interest rates would not rise. If Omicron means a return to normalcy, investors will be faced with the highest inflation in a generation, record debt and a Fed that has no reason not to tackle inflation vigorously. At the same time, stocks and bonds are very expensive, limiting prudent investment options.

“There’s no place to hide,” Melda Mergen, Global Head of Equities at Columbia Threadneedle Investments, said during a presentation of the company’s 2022 outlook. “Most markets are at the top of the bar in their current valuations.”

She remains optimistic about stocks, but focuses on less expensive stocks, such as smaller companies and value stocks. However, she noted that the valuation gap between growth and value stocks has narrowed, so the selections are leaner.

Other investment advisors also recommend looking for less expensive market segments, but they differ on where to find them. Mr Sri-Kumar likes European equities more than US equities and would buy emerging markets such as India that are not dependent on strong growth in China, where he foresees increasing risk in 2022.

Ian Mortimer, co-manager of the Guinness Atkinson Global Innovators fund, suggests owning “quality defenses,” stocks in sectors with rising dividends. Some examples are British American Tobacco, Imperial Brands, which also sell tobacco, and the insurance company Aflac.

For Mr. Hyman, “the picture for equities is a lot better than the picture for bonds.” He said the financial, energy and materials industries tend to do well when interest rates rise.

If stocks outperform bonds in 2022, it means more of the same for fund owners. The average bond fund held steady in the fourth quarter, up 1 percent for all of 2021. The standout niches, each yielding about 5 percent year-over-year, held bank loans and high-yield bonds.

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