Equities to grind higher amidst heightened volatility: ANZ Bank

The ASX in 2022 feels like lockdowns all over again - brief periods of hope, followed by longer, harsher lockdowns. 

The S&P/ASX 200 is down -7.9% year-to-date. But perhaps what hurts the most is the sharp reversals from the US markets, more often than not, rallying 1-2% at open before closing sharply lower.

In light of this heightened volatility, investors can still expect to outperform bonds and cash, according to a Global Market Outlook report from Australia and New Zealand Banking Group (ASX: ANZ).

A strong macroeconomic backdrop

The continuation of relatively accommodative policy should see GDP rise globally by approximately 4% in 2022, said ANZ in its report.

The rise will be led by Australia (5.1%), the United States (4.5%) and Europe (4.4%). Though warned that China's growth is expected to slow to 4.6% this year, which 2020 aside, should represent the nation's weakest figure in modern history.

Inflationary pressures to ease

"In 2022, we expect inflation to moderate in H2 from the highs seen in late 2021 as supply-chain dynamics begin to normalise and base effects," A&NZ Head of Investment Strategy, Lakshman Anantakrishnan.

Anantakrishnan expects the RBA to begin raising interest rates in the first half of 2023, increasing the cash rate to 0.25% initially and by a further 75 basis points by year-end.

"The reaction function of central banks and policy makers in dealing with such risks is likely to be the key driver of markets in 2022, as investors watch keenly for any downside surprises."

Investors need to stay active

Energy and material sectors have held up relatively well amid the markets' recent correction. While the S&P/ASX 200 Info Tech Index has plunged -22.9% year-to-date.

Amidst this volatile environment, Anantakrishnan said "the ability to make quick tactical shifts to portfolio allocations throughout the year could pay dividends for investors."

Sectors to watch

ANZ expects the local share market to lag behind its global peers in 2022, with "any outperformance here hinges greatly on the ability of both the banks and miners to provide strong gains concurrently — something we see as unlikely at this point."

"If central banks begin normalising policy as expected, then financials may become more attractive. Materials, however, are likely to be constrained by a slowing Chinese economy and further easing in the price of iron ore."