Despite a wall of worry with Coronavirus and inflation, 2021 was a great year for diversified investors, with average balanced-growth super funds looking to have returned around 14%, after just 3.6% in 2020. 

Balanced-growth super-fund returns have averaged around 8.5% per annum over the last five years, well above inflation and bank-deposit rates, according to AMP analysis.

But can strong returns continue? Here is a simple point-form summary of key insights and views on the investment outlook. 

Six things that went wrong in 2021
 

1. Several Coronavirus waves disrupted economic activity.
   
   
2. Inflation took off as Coronavirus boosted spending on goods and disrupted production and supply chains.
   
   
3. Some key central banks started to remove monetary stimulus earlier than expected, with some raising rates.
   
   
4. Bond yields surged.
   
   
5. Chinese growth slowed sharply.
   
   
6. Geopolitical tensions with China, Russia and Iran stayed high. 
   

But there were three big positives
 

1. Science and medicine appeared to offer hope of getting on top of Coronavirus. This saw less severe illness through the mid-year Delta wave compared to the 2020 waves.
   
   
2. As a result, the broad trend was towards global reopening.
   
   
3. Monetary and fiscal policy remained ultra-easy.
   

As a result, global growth is estimated to have been nearly 6%. This drove strong profit growth and, along with low rates, saw strong returns from shares and other growth assets offsetting losses in bonds. 

Four lessons from 2021
 

1. Inflation is not dead – a surge in money supply under the right circumstances, in this case, massive fiscal stimulus and supply shortages, can still boost inflation.
   
   
2. Shares climb a wall of worry – particularly if earnings are rising and interest rates are low/monetary policy is easy.
   
   
3. Timing market moves is hard and the key is to have a well-diversified portfolio. Despite lots of worries, sharemarkets overall surprised with their strength but some sharemarkets (eg in Asia) and bonds performed poorly.
   
   
4. Turn down the noise – investors are getting bombarded with irrelevant, low-quality and conflicting information that confuses and adds to uncertainty. So, one of the best approaches is to turn down the noise and stick to a long-term strategy.
   

Seven reasons for optimism on economic growth 
 

1. Coronavirus could finally be moving from a pandemic to being endemic – more on this below.
   
   
2. Excess savings in the US and Australia will help to provide an ongoing boost to spending.
   
   
3. While US Federal Reserve and likely RBA monetary policy will tighten this year, in AMP's opinion those policies will still be easy. It’s usually only when policy becomes tight that it ends the economic cycle and the bull market – and in our view, that’s a fair way off.
   
   
4. Inventories are low and will need to be rebuilt, which will help boost production.
   
   
5. Positive wealth effects from the rise in share and home prices will help boost consumer spending.
   
   
6. China is likely to ease policy to boost growth. 
   
   
7. While business surveys are down from their highs, they remain strong and consistent with good growth.  
   

Global growth is likely to slow this year but to a still strong 5%, with Australian growth of around 4%, despite the Omicron wave resulting in a brief setback in the March quarter, in AMP's opinion. 

We have revised down our March quarter Australian GDP forecast by 1% to 0.6%, but revised up subsequent quarters by the same amount. 

Four reasons for optimism regarding Coronavirus
 

1. Vaccines are still providing protection against serious illness – particularly once booster shots are administered.
   
   
2. New Coronavirus treatments are on the way, which should aid in the treatment of the more vulnerable.
   
   
3. Omicron is more transmissible but less harmful (evident in far lower levels of hospitalisations and deaths relative to the surge in new cases compared to past waves) and so could come to dominate other variants.
   
   
4. Past Covid exposure is likely to provide a degree of herd immunity. 
   

Combined, this could set Coronavirus on the path to being endemic where we learn to “live” with it.  South Africa, London and New York are possibly already seeing signs of a peak in Omicron. 

Of course, the risk of new variants that are more transmissible and more deadly remains – which is why it’s in the interest of developed countries to speed up global vaccination.  

Key views on markets for 2022

Still-solid economic growth, rising profits and still easy monetary conditions should result in good overall investment returns. 

1. Global shares are expected to return around 8% but expect to see a rotation away from growth and tech-heavy US shares to more cyclical markets. 
   
   
2. Australian shares are likely to outperform, helped by leverage to the global cyclical recovery and as investors continue to search for yield in the face of near-zero deposit rates but a grossed-up dividend yield of around 5%.
   
   
3. Still-very-low yields and a capital loss from a rise in yields are likely to again result in negative returns from bonds.
   
   
4. Unlisted commercial property may see some weakness in retail and office returns, but industrial property is likely to be strong. Unlisted infrastructure is expected to see solid returns.
   
   
5. Australian home-price gains are likely to slow with prices falling later in the year as poor affordability, rising fixed rates, higher interest-rate serviceability buffers, reduced home-buyer incentives and higher listings impact.
   
   
6. Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
   
   
7. Although the Australian dollar could fall further in response to Coronavirus and Fed tightening, a rising trend is likely over the next 12 months, helped by still-strong commodity prices and a decline in the $US, probably taking it to around $US0.80. 
   

Five reasons to expect more volatility

1. Inflation – while it’s likely to moderate this year as production rises and goods demand subsides, it is likely to be associated with ongoing scares and the risk that it’s higher for longer. 
   
   
2. The start of Fed and RBA rate hikes and quantitative tightening – monetary policy is unlikely to get tight enough to threaten the economic recovery and cyclical bull market, but monetary tightening could still cause volatility. 
   
   
3. The US mid-term elections – mid-term election years normally see below-average returns in US shares, and since 1950 have seen an average drawdown of 17%, albeit with an average 33% gain over the subsequent 12 months, according to AMP analysis. 
   
   
4. China/Russia/Iran tensions – a partial Russian invasion of Ukraine could lead to even higher European gas prices.
   
   
5. Mean reversion – shares are no longer cheap. The easy gains are behind us and calm years like 2021 tend to be followed by volatile years.
   

Six things to watch
 

1. Coronavirus – new variants could set back the recovery. 
   
   
2. Inflation – if it continues to rise and long-term inflation expectations rise, central banks may have to tighten aggressively, putting pressure on asset valuations.
   
   
3. US politics – political polarisation is likely to return to the fore in the US, posing the risk of a deeper-than-normal mid-term election-year correction in shares.  
   
   
4. China issues are likely to continue – with the main risks around its property sector and Taiwan.
   
   
5. Russia – a Ukraine invasion could add to EU energy issues.
   
   
6. The Australian election – but if the policy differences remain minor, a change in government would likely have little impact.
   

Nine things investors should remember 
 

1. Make the most of the power of compound interest. Saving regularly in growth assets can grow wealth substantially over long periods. Using the “rule of 72”, it will take 144 years to double an asset’s value if it returns 0.5% per annum (ie 72/0.5) but only 14 years if the asset returns 5% per annum.
   
   
2. Don’t get thrown off by the cycle. Falls in asset markets can throw investors out of a well-thought-out strategy.  
   
   
3. Invest for the long term. Given the difficulty in timing market moves, for most it’s best to get a long-term plan that suits your wealth, age and risk tolerance and stick to it. 
   
   
4. Diversify. Don’t put all your eggs in one basket.
   
   
5. Turn down the noise. 
   
   
6. Buy low, sell high. The cheaper you buy an asset, the higher its prospective return will likely be and vice versa. 
   
   
7. Avoid the crowd at extremes. Don’t get sucked into euphoria or doom and gloom around an asset.
   
   
8. Focus on investments you understand offering sustainable cash flow. If it looks dodgy, hard to understand or has to be justified by odd valuations or lots of debt, then stay away.  
   
   
9. Seek advice. Investing can get complicated and it’s often hard to stick to a long-term investment strategy on your own.