Five key investment themes to watch in 2022

Article

Corrin Collocott, BT’s Chief Investment Officer shares some insights on the key themes his team is focused on this year. 

There was a sense of déjà vu in late 2021 as the emergence of Omicron, a new COVID-19 variant saw the world grapple with surging cases. But efforts by advanced economies to up vaccination rates during the year reduced the risk of further lockdowns.

While lockdowns are unlikely in the new year, it’s clear the year ahead will be one of transition as the world readjusts to “living with” COVID.

Among the key investment market themes to watch in the year ahead, we’ve narrowed them down to five.

1. Central bank policy on inflation and interest rates

A moderate level of inflation is good for investment returns because it reflects positive growth and demand dynamics, signalling corporate profitability and broader economic prosperity.

However, there’s ongoing uncertainty about the core drivers of inflation. Inflation is likely to be higher and more volatile over the next two to five years than it has been during the previous 10 to 20 years.

In response, most central banks have signalled the beginning of tightening their interest rate policies.

As an example, the US Federal Reserve has indicated it will reduce its government-backed security purchasing programme earlier than expected and bring forward rate hikes.

Overall, we expect interest rates to start to rise as early as mid-2022 because it will be difficult to maintain the current low-rate levels when countries are operating at more ‘normal’ activity levels.

2. The COVID-19 pandemic

The pandemic is not over. The late 2021 spike in case numbers due to the Omicron variant is a good example that new strains will likely still emerge and present an ongoing threat to economic recovery until the developing world catches up with vaccination rates and there’s broad adoption of booster shots.

The effects of lockdowns will also continue to be felt for some time.

It takes far longer to reopen economies, restart supply chains, and remobilise a displaced labour force than to shut them down. Our discussions with global investment managers suggest these tensions will gradually ease in 2022, with the above-trend demand for goods and below-trend demand for services ultimately rebalancing.

3. China’s growth story

China’s extraordinary growth and development since the 1980’s is always a hot topic.

But more recent events, such as the need for China’s government to inject liquidity into its financial system after the country’s second-largest property developer teetered on the edge of collapse, have caused some to take a closer look.

China’s growth is slowing, and when combined with high inflation, worse fiscal deficits, and greater geo-political volatility, it’s one to watch carefully – including the impact on commodity prices, which are particularly important to Australia’s economy.

4. Supply chain concerns

The recent surge in energy prices in Europe due to low stock, high Asian demand, high carbon prices, supply chain bottlenecks and outages has threatened to generate even higher oil and gas prices.

This is key to the “transitory” or “structural” inflation debate dominating global markets, given the flow through consequences for interest rates.

But as countries reopen and global economic activity returns to normal, our view is the mismatch between the supply and demand for goods should start to level out.

5. Climate change

Since the United Nation’s Climate Change Conference (COP26), there’s been a spotlight on the journey to net-zero.

The Australian Government committed to cut emissions by 26 per cent below 2005 levels by 2030 in its effort to reach zero net emissions by 2050.

But other countries took a more aggressive stance towards their net-zero goals, which could see sectors like technology receive additional investment as new green policies and strategies emerge.

How has your Super performed in 2021?

MySuper investment options

Members in the BT MySuper Lifestage funds were rewarded with good returns in 2021.

Our younger members in the BT Super and BT Super for Life 1970s, 1980s, 1990s and 2000s Lifestage investment options have around 90% of their super invested in growth assets (primarily shares and property), and they benefited from the strength in share markets over 2021 that saw returns for these funds ranging between 16.52% and 16.60% for the year.

Members in the BT Super and BT Super for Life 1960s Lifestage investment option, which has around 60% invested in growth assets, earned a solid 10.78% for the 2021 calendar year.

The 1940s and 1950s Lifestage investment options have a higher proportion invested in defensive assets to help cushion these members’ account balances should negative market events happen as they approach, or are in, retirement. Our one-year returns continued to be in line with the product’s design, with the 1940s option returning 4.99% and the 1950s returning 6.44% for the year.

Investment option name

1 year %

3 years (pa) %

5 years (pa) %

7 years (pa) %

10 years (pa) %

BT MySuper 1940s Lifestage

4.99

5.43

4.10

3.53

4.47

BT MySuper 1950s Lifestage

6.44

6.42

4.79

4.20

5.79

BT MySuper 1960s Lifestage

10.78

9.38

6.87

5.98

7.75

BT MySuper 1970s Lifestage

16.52

12.97

9.34

7.99

9.66

BT MySuper 1980s Lifestage

16.53

13.06

9.39

8.07

9.84

BT MySuper 1990s Lifestage

16.60

13.23

9.51

8.18

9.96

BT MySuper 2000s Lifestage

16.59

13.28

9.67

8.55

N/A*

Note: Performance figures are calculated to 31 December 2021 in accordance with the APRA reporting standards. Total returns are calculated using withdrawal prices appropriate for the month end and take into account management costs and monthly administration fee and take into account earnings tax up to a maximum of 15%. *The BT MySuper 2000s Lifestage investment option has been open for less than 10 years.

Choice investment options

While many of our BT Super and BT Super for Life members are invested in our MySuper Lifestage investment options, some of our members have chosen to personalise their super by selecting their own mix from our broader menu of 38 investment options.

These members would see a range of returns for the 12 months to 31 December 2021, depending on how they’re invested i.e., higher returns where they’re invested in funds with a greater allocation to growth assets like Australian or international shares or property, and more moderate returns for investment options with a higher allocation to defensive assets like cash and fixed interest securities.

What can you expect from markets in 2022?

As we move through the year, we expect continued economic growth as COVID concerns begin to fade and major economies regain momentum.

Many households have excess savings to spend, corporates are looking to increase investment with both fiscal and monetary policy expected to remain supportive, albeit to a lesser degree than 2021.

While this bodes well for shares, volatility is expected to continue to feature due to headwinds such as China’s gradual slowdown, central bank interest rate policy and increased concerns over upward inflationary pressures.

Given the uncertain outlook, diversification across different markets and asset classes to minimise the impacts of a single economic or market event has arguably never been more important.

As the past few years have shown, predicting the future isn’t easy and not getting any easier. But what it’s strengthened in our minds is that avoiding panic and sticking to process provides the best chance of hitting long-term investment goals – regardless of short-term shocks and volatility.

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Things you should know

The information is prepared by BT Funds Management Limited ABN 63 002 916 458 (BTFM) the trustee of the following: BT Super for Life, BT Super for Life Westpac Group Plan and BT Super part of the superannuation fund Retirement Wrap ABN 39 827 542 991.

This information has been prepared as general advice only and does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs before acting on it. Read the Product Disclosure Statement (PDS) to see if these products are right for you by visiting bt.com.au. The issuers of the products named in this article can be found in the relevant disclosure documents. Read the disclosure documents for your selected product before deciding. Target Market Determinations for our products can be found here. Past performance is not a reliable indication of future performance. All examples are illustrative only. Your portfolio value and performance will depend on the investment options you have selected and the time over which they are invested. 

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