December 27, 2021

Monday Morning Memo: 2022 – Full Steam Ahead or is a Crisis Looming on the Horizon?

by Detlef Glow.

The European fund industry can look back on a quite successful year in 2021 since the industry enjoyed in general healthy inflows despite the third and fourth wave of the COVID-19 pandemic hitting the economies of Europe and all over the world. That said, one would expect cautious behavior from investors and corporations in such an environment, but in fact the opposite was the case. European investors bought into risky assets and we witnessed high mergers-and-acquisitions activity on all levels of the asset management industry.

With these developments in mind, one might forecast an even better year in 2022 since investors and corporations have become somewhat used to the dynamics of the COVID-19 pandemic. But from my point of view, the year 2022 looks quite challenging since the new omicron variant of the virus has the potential to hit economies as hard as the alpha variant did. In fact, we have already witnessed the first omicron lockdowns in some European countries. Even as these lockdowns are currently not as hard as those over the course of the first half of 2020, they have the potential to disrupt supply chains over the course of 2022. With regard to this, one needs to bear in mind that we are still facing issues within the supply chains of a number of industries.

These confounding factors hit the markets in a situation in which equities show somewhat high valuations with regards to their anticipated future growth, while some central banks are ready to taper their quantitative easing policies in light of rising inflation rates. Therefore, it is not surprising that investors are uncertain about the outlook for the corporations within their portfolios. These circumstances lead to an increased volatility on the equity markets around the world.

With these theses in mind, 2022 does not look very promising for the European fund industry at first glance, as falling equity markets and/or increasing interest rates may lead to massive outflows from mutual funds and ETFs over the course of the year.

Nevertheless, I still believe that the European fund industry will face a difficult but still positive year since I expect that any kind of market disruption will only be temporary, as governments and central banks are ready to step in to avert a major incident caused by the coronavirus. Therefore, one may conclude that the European fund industry needs to prepare for rough times within what should be a generally positive year in 2022.

I also assume that we will witness several corporate transactions on all levels of the asset management industry, since all kinds of companies are preparing themselves for the future by buying competitors to generate scale or by buying specialized companies to enhance their product and/or service offering.

This means I am expecting 2022 to be another positive year for the European fund industry despite some incriminating factors looming on the horizon which have the potential to cause a major market drawdown.

The views expressed are the views of the author, not necessarily those of Lipper or Refinitiv.

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