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Monthly Investment Outlook

Wells Fargo Investment Institute - December 15, 2021

Presenter: Paul Christopher, CFA, Head of Global Market Strategy, Wells Fargo Investment Institute

Transcript: 2022 Outlook: Which way to the recovery?

Jobs are plentiful, companies are profitable, businesses have reopened, and we’ve seen a third straight year of strong price gains in the S&P 500. However, consumers see low inventories on some products as they do their holiday shopping, difficulties finding cars to buy, worker shortages at their favorite restaurants, and increases in prices at the grocery store and the pump. All this is leaving investors wondering if continued elevated inflation and high energy prices will cut into corporate earnings in 2022 — and bring volatility to portfolios.

Our 2022 Outlook strives to help investors separate the noise from the important information and offer a clear direction on what we believe is next for the recovery.

[On-screen graphic – 2022 Outlook: Which way to the recovery?]

As the post-COVID-19 economy comes into view, 2022 looks to be an important transition year as we expect the booming growth profile of 2021 to slow to a more sustainable trajectory that is still above-average.

We believe economic growth and inflation — both in the U.S. and around the world — should stay elevated in 2022, but the U.S. is likely to remain the world’s main driver of economic activity. That advantage should favor continued strengthening of the dollar — that’s an added headwind for export-oriented Asia and Europe. What’s more, the strong dollar along with consumer-led growth in the U.S. reinforce our preference for U.S. financial markets — specifically higher-quality, and less cyclical equities.

The main risk comes from the ongoing disruptions to goods inventories, and the risk that the COVID-19 restrictions on personal contact may continue to prevent service industries, such as restaurants, hotels, and travel from getting back on their feet. The inventory shortages also raise prices. Our view is that economic growth will remain strong, but that inventories gradually will catch up and reduce inflation.

[On-screen graphic – What does this mean for investors?]

So, with the economy at a crossroads between strong recovery, on the one hand, and disruptions and inflation, on the other, we believe that investors should still follow the road to continued growth. The economy should stay on track.

That’s why we believe that equities will again outperform fixed income, and that the U.S. equity markets will outperform international markets.

[On-screen graphic – U.S. Large-Cap, U.S. Mid-Cap, Balance between growth and cyclical equity sectors]

In U.S. equities, we favor quality and larger firms, U.S. large-cap and mid-cap, and a balance between growth and cyclical equity sectors.

[On-screen graphic – Favored sectors: Leveraged loans, Commercial mortgage-backed securities, Preferred securities, Municipal securities]

In fixed income, the continuing recovery coupled with a modest rise in interest rates should support credit and spread-oriented asset classes and sectors, such as, leveraged loans, commercial mortgage-backed securities, and preferreds. Tax-exempt income is likely to be in high demand given the expectations for higher tax rates.

[On-screen graphic – Favored real assets: Commodities, Real estate investment trust (REITs) subsectors: Industrials, Residential (including apartments, single-family properties and selfstorage), Infrastructure or cell towers]

Meanwhile, commodity prices are unlikely to repeat their stellar performance of the past year, but we do expect more upside. And in Real Estate Investment Trusts, we favor Industrial, Residential, and Infrastructure.

[On-screen graphic – Most favored strategies: Relative Value: Arbitrage, Macro: Systematic and Discretionary, Event Driven: Merger Arbitrage, Private Equity: Small/Mid Cap buyouts and Growth Equity/Venture, Private Debt: Direct Lending]

And for alternatives, we are pivoting our hedge fund guidance in 2022 toward the Relative Value and Macro strategies, which we believe can provide diversification and non-correlated returns to global risky assets.

To learn more about what we believe is next for the recovery, please download our Wells Fargo Investment Institute report: 2022 Outlook: Which way to the recovery?