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Our 10 Big Investment Trends for 2022

As we look ahead to the new year, Fred Demers, Director, Multi-Asset Solutions, shares his views and predictions on the big investment trends shaping the economy, markets – and your clients’ portfolios. Fred’s research and opinions directly influence the strategy and makeup of BMO’s ETF Portfolios.

February 2022

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Fred Demers

Director, Multi-Asset Solutions

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The impact of COVID on the economy and markets has been a constantly evolving scenario, particularly as each new variant presents its own unique issues and challenges. Volatility has become the new normal in many ways. Under this lens, we wanted to highlight the 10 big trends for 2022, and how they could impact our investment mandate and funds.

1. Inflation is back!

If there was one lesson that economists and market analysts learned in the aftermath of the Great Financial Crisis of 2008, it was that monetary policy alone cannot abate a recession. And that was why this most recent downturn was met by strong fiscal policies on a global scale.

Governments around the world responded to the pandemic with robust stimulus plans in order to avoid the job losses and economic decline that transpired a little over a decade ago. While these actions had their desired effect, they also led to the current inflationary environment. Strong consumer demand across a variety of sectors fueled supply chain issues, product shortages and price increases, with no clear sign of subsiding anytime soon.

The impact of rising prices on the markets has been fairly pronounced, especially if you layer the impending rate increases coming from central banks. Fixed income investing will likely experience considerable headwinds in the short to medium-term, while higher borrowing costs will also impact stock prices for those companies with weaker balance sheets.

Product Solutions

BMO Dividend Fund

BMO Global Dividend Fund

BMO Concentrated Global Equity Fund

BMO Covered Call Canadian Banks ETF Fund

BMO Sustainable Global Multi-Sector Bond Fund

2. Reigning in government borrowing

As we noted above, government debt had a place in diminishing the economic fallout at the outset of the pandemic, and it worked particularly well at dampening both unemployment and a prolonged recession. But as inflation revs into full gear and the prognosis for rate increases move closer to fruition, politicians now to need to shift their attention to more enduring long-term solutions.

Indeed, it’s the carrying costs related to higher interest rates that pose the greatest concerns for the balance sheets of nations around the world, and for bond investors as well. It’s this issue that is likely to diminish the pace and severity of central bank moves in the coming months.

3. Corporate debt is no longer a story

One of the more positive developments that came out of the 2008 financial crisis was that it forced many companies to reduce their debt loads in order to decrease risk. Most companies did an admirable job of achieving this, such that corporate liabilities are no longer as significant an issue as they once were.

Leverage has therefore become more manageable, most notably for the financial sector, alleviating concerns for many investors. This provides a heightened level of stability for capital markets, delivering the confidence and reassurances that markets typically look for after a period of turmoil.

4. Central bank balance sheets expanding at the seams

The bloating in central bank balance sheets since the start of the pandemic – which increased by over $10 trillion over this period – signifies a monetary policy approach that’s geared toward damage control. Authorities at the U.S. Federal Reserve, Bank of Canada and elsewhere were primarily concerned with preventing global economies from contracting during these challenging times. However, the question now becomes what’s next, and how they will respond to the rise in inflation.

With rate hikes on the horizon, it’s clear central banks will have to move more carefully and in a gradual fashion in order to lessen any fallout. There is little desire to hit hard on inflation via higher rates given the negative ramifications this would have on the overall economy. As one would expect, this tempered approach should have a positive impact on equity markets.

5. Populism shifts to solving income inequalities

There continues to be considerable dialogue on the topic of income inequality, and the resulting social imbalances it creates. For many pundits, the concern revolves around the lack of a trickle-down effect from Wall Street to Main Street, and how little working-class people benefit from the gains achieved in capital markets.

The political response to this issue has often centred around taxation, and specifically increases for corporations and higher income earners. The reality is that these types of policy changes are easier to discuss than implement, given the partisan gridlock that we’ve witnessed in the US. That said, it’s unlikely that we have seen the end of this populist cycle, nor the large deficits they’ve generated.

6. Geopolitics – The rumblings are growing louder

Global unrest is by no means a new topic, however it does appear to have resurfaced in recent years. What’s interesting to note is that while trade battles and chatter around deglobalization have escalated, global trade is in fact booming. This suggests much of the anti-trade rhetoric may be nothing more than political noise designed to impart a partisan sentiment.

Nonetheless, the reality is that firms will always seek low-cost production centres – typically found in Southeast Asia – in response to consumer demand for lower-priced goods and services. And this trend is unlikely to change anytime soon. The same can be said for cries for the reshoring of manufacturing activity in either North America or Europe, a request that is simply not feasible or realistic at this time.

Product Solutions

BMO U.S. Equity Plus Fund

BMO Concentrated Global Equity Fund

BMO Sustainable Opportunities Global Equity Fund

7. The sky is truly the limit with healthcare technology

Healthcare technology received a big push due to the pandemic, particularly as it related to vaccines and pharmaceuticals. Taking a longer-term view, the “quest for eternal life” will be another trend impacting society and the markets in the coming years. An aging population will be the impetus for this, driving many innovations in the biotech space.

An MIT study1 showed that artificial intelligence will be a critical movement in this sector over the next 10 years, given its ability to expedite the required research and transform many aspects of how we live. For similar reasons, big data will also be impactful in its capacity to collect and process large amounts of information to make more accurate and timely diagnoses. Fear of the next pandemic will no doubt be top of mind for many over the next decade, accelerating ways to better prepare for its arrival. This will in turn generate considerable investor attention and interest.

8. The pandemic has expedited the digitization movement

If there is one thing we’ve learned in the past two years of the global pandemic, it’s that digitization is now table stakes; those that fail to adapt are likely to fall behind, if not perish. The rapid transition to a work-from-home environment forced many companies to rapidly shift their business model and implement new technology solutions to facilitate online collaboration. Few, if any, companies will be reverting back to what once existed, or dismantling their telecommuting infrastructure.

Beyond the obvious impact of COVID, there are several reasons why the evolution of this digital sphere is important for investors. Whether it’s the remarkable speed of today’s new product development cycle or the manner in which 5G, Internet of Things or the green movement are affecting our everyday lives, it’s apparent that considerable resources are being directed to this sector. This is attracting many investors who are looking to capitalize on the growth potential that will evolve from this transforming trend.

Product Solutions

BMO MSCI Innovation Index ETF (Ticker: ZINN)

BMO MSCI Genomic Innovation Index ETF (Ticker: ZGEN)

BMO MSCI Fintech Innovation Index ETF (Ticker: ZFIN)

BMO MSCI Tech & Industrial Innovation Index ETF (Ticker: ZAUT)

BMO MSCI Next Gen Internet Innovation Index ETF (Ticker: ZINT)

9. Why you need to pay attention to cryptocurrencies

The emergence of cryptocurrencies has occurred in large part due to a lack of confidence with traditional “fiat” currencies and their ability to preserve one’s purchasing power. In a period of high inflation and large public debt, it’s no surprise that consumer confidence has diminished and skepticism is more prevalent than ever. As a result, people are trying to find other asset types to preserve their wealth, and this is where crypto could come into play.

It’s our belief that we will see more of this technology-enabled phenomenon over the next 10 years. However, the jury is still out on whether crypto can also play a role as a payment mechanism for financial transactions, which was one of its original intentions. It’s important to note there are also some “political threats” in play, particularly in the U.S., where regulators could seek to replicate the government’s 1933 response to the owning of gold as a threat relative to the US dollar.

10. The timely demise of the 60/40 portfolio

With interest rates hovering at historically low levels for over a decade, there is little wonder the case for holding bonds and many other fixed income assets can be called into question. The resulting shift in portfolio construction suggests your clients will have to take on more risk than they’ve had to over the past twenty years in order to generate comparable returns. They will also have to get more comfortable with owning a wider array of assets across different asset classes and regions.

This shift in strategy and approach builds a strong case for developing core strategic portfolios in conjunction with an active management philosophy. It also suggests that advisors who are capable of taking advantage of market volatility will be able to deliver additional alpha for their clients. This is why much of our research has been focused on finding ways to improve returns at the margin – generating that extra performance without taking on too much risk.

Product Solutions

BMO ETF Portfolios – see sidebar

BMO Retirement Portfolios – see sidebar

Strategic funds combined with tactical flexibility…

In 2022, our Multi Asset Solutions Team will be increasing equity exposure within the BMO ETF Portfolios. We’re also recommending lower volatility equity solutions, in addition to a combination of thematic ETFs with mutual funds, to enable both strategic and tactical asset allocation decisions.

Working with your BMO wholesaler

These 10 big investment trends are transforming markets in real time. When it comes to taking the next step and deciding which BMO investment solutions would work best for you and your clients, we encourage you to reach out to your BMO GAM wholesaler for their support and guidance.

1 “Discover Top 10 BioTech Industry Trends & Innovations in 2022,” StartUs Insights Research Blog.


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