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research report

Globe editors have posted this research report with permission of Canaccord Genuity. This should not be construed as an endorsement of the report’s recommendations. For more on The Globe’s disclaimers please read here. The following is excerpted from the report:

We believe the race to maximum employment and an incomplete global restocking cycle remain the primary upward forces pulling world economic growth in 2022. Downward pulls are new variants of COVID-19 and market-based factors whereby a sharp rise in bond yields, oil prices and the US$ could magnify the restrictive impact of rising policy rates. As supply chain disruptions ease, inflation should moderate in H1/22 before likely reaccelerating in H2/22. The transition from supply to demand and service-push inflation should prompt many central banks to initiate tightening cycles. Overall, global growth is expected to downshift in 2022, but at ~5%, according to the IMF, it remains well above the historical average of ~3.5%.

A tug-of-war between interest rates and earnings should lead to a choppier environment for stocks in 2022. We believe this is especially true considering that, in contrast with December last year, equity risk premiums (ERPs) have melted in many areas of the market. Also, net speculative positions in equity futures have risen to record highs, bond yields are on the rise and our earnings models have cratered owing to rising input/wage costs. We believe this means that either ERPs fall further in 2022, possibly setting in motion a large-cap growth mania, or there is a net rotation into small-cap, mid-cap and value stocks where ERPs are still reasonable. We assign higher probabilities to the latter but still recommend investors take on portfolio risk at the sector level by favouring cyclicals vs. defensives through the early part of the year.

We believe a non-trivial risk later in 2022 is that the projected decline in inflation turns out to be transitory, prompting world central banks to push harder on the brakes. As such, investors should keep an eye on the US 10y-2y bond yield curve, since the last time it flattened below 50bps, in spring 2018, there was a net rotation away from cyclicals into defensive sectors. We see such a shift as highly likely, given that entering 2022 positioning in cyclical stocks is getting stretched. Accordingly, we recommend investors gradually build positions in more defensive sectors throughout the year, as the first Fed hike has historically triggered a rotation from growth to defensive stocks

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