The International Monetary Fund cut its world economic growth forecast for 2022 as the Covid-19 pandemic enters its third year, citing weaker prospects for the U.S. and China along with persistent inflation. Concerns over the stalled talks between Russia and NATO allies have added a layer of geopolitical risk to the heightened uncertainty. The IMF has estimated that the world economy expanded 5.9% last year, the most in four decades. That followed a 3.1% contraction in 2020 that was the worst peacetime decline in broader figures since the Great Depression.1

The IMF has indicated that inflation is expected to remain elevated in the near term, averaging 3.9% in advanced economies and 5.9% in emerging market and developing economies in 2022, before subsiding in 2023.2 A big part of the inflation story involves trade decoupling and increased support for domestic labor. Central banks that slashed interest rates to soften the economic decline caused by the pandemic face pressure to tighten policy to confront surging consumer prices, threatening to curtail the growth rebound. Governments also have less fiscal space for spending to address health needs and buoy their economies after piling up record debt. In January, we revised forecast of Growth (U.S. GDP greater than 2.5%) to an Inflation Outlook (U.S. CPI greater than 3.5%) for the first three months and Growth for the remaining nine months of the twelve -month forecast horizon.

China’s economic growth slowed during the fourth quarter of 2021. The economy expanded by 4.0% year-on-year in October-December, as multiple headwinds including a property downturn, supply chain issues, and COVID-19 outbreaks occurred. In the full year of 2021, the economy grew 8.1%, the fastest expansion in nearly a decade.3 China’s trade surplus in 2021 widened to USD 676.4 billion, the highest on record, from USD 524 billion in 2020, as exports surged 29.9% and imports 30.1%. China’s trade surplus with the U.S. was USD 396.58 billion for the whole of 2021, 25% higher than in 2020.4

The Eurozone economy expanded 3.9% year-on-year in the third quarter of 2021.5 Annual inflation in the Euro Area accelerated for the sixth straight month to a record high of 5% in December of 2021 from 4.9% in November.6 Annual inflation in the U.K. increased to 5.4% in December of 2021 from 5.1% in November. This is the highest reading since March 1992.7

The U.S. economy grew by an annualized 2.3% on quarter in Q3 2021. A resurgence of COVID-19 cases resulted in new restrictions and delays in the reopening of establishments in some parts of the country.8 Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased in the third quarter. The annual inflation rate accelerated to 7% in the last month of 2021, a fresh high since June of 1982.9 Energy was the biggest contributor to the gain. Inflation spiked in 2021 due to soaring energy costs, pandemic-induced supply constraints, labour shortages, increasing demand, and a low base effect from 2020. In the United States, a sharp decline in unemployment has been accompanied by nominal wage growth, a degree of tightening in U.S. labor markets that is not occurring in other economies. Tighter labor markets may feed through to higher prices. As a result, the Federal Reserve communicated in December 2021 that it will taper asset purchases at a faster pace and signaled that the federal funds rate will be raised in 2022.

Despite the ongoing pandemic, U.S. equities had a banner year in 2021, with the S&P 500 reaching 70 closing highs on its way to a 28.7% return. Mega-caps outperformed, with the S&P 500 Top 50 up 30.8%. Small-Caps outperformed Mid-Caps in 2021, with the S&P Small Cap 600 up 26.8% while the S&P Mid Cap 400 was up 24.8%. Canadian equities had a strong year, with the S&P/TSX Composite up 25.1%, the best performance since 2009. The S&P Europe 350 set several new records, adding 5.6% in the final month to finish 2021 with a 26.1% total return. The Netherlands, Austria, Sweden, Italy, and France all had positive contributions. The S&P Pan Asia BMI gained 2.1% in December, narrowly moving into the black for 2021 with a gain of 0.9%. The market standard commodities benchmark, the S&P GSCI, rose 40.4% in 2021, as high and rising inflation provided a backdrop for this inflation-sensitive asset class. Commodities finished strong in December, rising 7.6% over the month as energy bounced back.

In January, we maintained our Asset Allocation across all models. We are monitoring U.S. equity exposure as we gauge the impact of multiple factors including Fed tightening, the impact of the pandemic, and geopolitics involving Russia-Ukraine. The high multiples and ‘intentional plan to lose money now because the future is huge’ business models have led to volatility and corrections in January. Corporate earnings across all market caps were solid in Q3 and are being monitored as reporting begins for Q4. U.S. fiscal spending that will fund local governments in the pending infrastructure bill supports our exposure to short-term treasuries and municipal bond exposure in the U.S. We believe that U.S. rate increases in 2022 will be done cautiously so as not to risk causing a recession.

The changing picture of the economy comes with structural challenges but eventually leads to improved liquidity, healthy consumer balance sheets, and a healing labor market. From U.S.–China decoupling to the shift to a low-carbon economy to the rise of technologies, we are not going back to the 1990s, when cheap goods were the zero-inflation offset for the rising cost of housing, as well as education and healthcare. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.


Deborah Frame, President and CIO


1 International Monetary Fund. World Economic Outlook. January 2022.

2 International Monetary Fund. World Economic Outlook. January 2022.

3 Trading Economics. China GDP Growth. January 17, 2022.

4 Trading Economics. China Trade. January 14, 2022.

5 Trading Economics. Eurozone GDP Growth. December 7, 2021.

6 Trading Economics. Europe Inflation. January 7, 2022.

7 Trading Economics. U.K. Inflation. January 19, 2022.

8 Trading Economics. U.S. GDP Growth. December 22, 2021.

9 Trading Economics. U.S. Inflation. January 12, 2022.


Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. December 31, 2021. Index performance is based on total returns and expressed in the local currency of the index.