05 January, 2022

Final Look at 2021 and Our Outlook for 2022

Letter from Corrado Tiralongo

For me, 2022 brings great hope and anticipation for the possibilities and obstacles that a new year will bring.

The holidays are a time for stillness and reflection, looking back at the last year’s possibilities to see how we navigated them and where there are opportunities for us to improve. Obstacles, in my mind, are opportunities for my team and I to improve the investment outcomes for our clients. But before looking ahead to 2022, it’s useful to look back and see what we got right and wrong in 2021.

Twelve months ago, we said 2021 would be a year of recovery, catch-up, and accommodation. In other words, we thought that the global economy would stage an impressive recovery, that those economies that had lagged in the second half of 2020 would catch up in 2021, and that central banks would keep fiscal and monetary support extremely loose. At the risk of singing our own praises, this has broadly been the case.

Our expectation for economic growth in 2021 was that there was going to be a significant recovery in global GDP in the second half of 2021. We don’t yet have complete data for Q4, but the economic trackers that we follow suggest the global economy will grow by about 6% this year. We believed that this improvement in economic fundamentals would bode well for markets, especially for cyclical assets, such as industrials, consumer discretionary, and material companies.

“We believed that the wide variation in economic outcomes would be a positive environment for active management, and, as a result, we expected that our active, non-benchmark strategies, such as global small cap and real estate, to do well in this phase.”

The economies that lagged in the initial phase of the recovery, notably the euro-zone and the U.K., have caught up, while the leaders, such as China, have slipped back. We believed that the wide variation in economic outcomes would be a positive environment for active management, and, as a result, we expected that our active, non-benchmark strategies, such as global small cap and real estate, to do well in this phase. Our positioning in 2021 was overweight in risk assets and credit, with a focus on healthy weights in global real estate and global small cap.

Finally, despite a sharp acceleration in inflation (more on that later), central banks have kept monetary conditions extremely accommodative.

All of this meant our expectations for 2021 were broadly correct. We argued that continued monetary accommodation would keep a lid on bond yields which, against the backdrop of economic recovery, would mean a generally positive environment for risk assets including equities and real estate.

So how did we fare? At year-end, global equities returned 23.0% in Canadian dollar terms. Our global real estate fund returned 25.4%, and our global small-cap fund returned 20.5%, handily beating its benchmark. All of these were positive contributors to the performance of the Counsel Strategic Portfolios, which are first quartile over a 12-month period in their respective categories.* More broadly, our overweight to equities served all of the Counsel and IPC portfolio families well in 2021, and we remain tilted to equities for the time being.

So far, so good. But what did we get wrong? A couple of things stand out. While our expectations of global equities were correct, we missed the extreme outperformance of the U.S. stock market. Second, we underestimated the magnitude of inflation’s rebound. Going into 2021, we expected a pick-up in inflation at around 3%, particularly in the U.S., and that it would be more “transitory” than it has been. In hindsight, that was too low as inflation now looks likely to peak somewhere between 5-7%. This is partly to do with the sharp surge in commodity prices – energy accounted for about six-tenths of the rebound in developed economies inflation this year – and also because goods and labour shortages hit harder than we assumed.

What to Expect in 2022

“One consequence is likely to be that, after a strong 2021, growth in 2022 will be weaker than most currently anticipate.”

One of the most important lessons for 2022 is that the dominant macro and market issues are being shaped by problems on the supply side of the global economy. Demand strongly rebounded in 2021, as we anticipated, but supply has struggled to keep pace in many areas. This largely reflects frictions caused by reopening the global economy from a standing start, which should eventually ease. But, this will take time, and supply-side strains are likely to be a continuing theme for much of 2022. One consequence is likely to be that, after a strong 2021, growth in 2022 will be weaker than most currently anticipate. Likewise, while inflation should fall back this year, in most countries, it will do so at a slower pace than most now expect.

At Counsel and IPC, we think that the macroeconomic backdrop is becoming more challenging. A combination of monetary tightening and stubbornly high inflation will mean returns on developed government bonds are likely to be flat to slightly negative. We anticipate that equities and commercial property returns will be higher than government bonds, but that high valuations and weaker growth will cause them to fall well short of returns in 2021. While many analysts are forecasting the start of a new commodities supercycle, we expect most commodity prices to fall next year.

Final Thoughts

The last two years have been difficult., The economic and health effects of the pandemic have touched everyone in one way or another. It would be easy to throw up our hands in despair and wish that things were as they were before March 2020. I choose to look back on these last two years with a positive lens, focusing on the blessings of family, friends, and colleagues. Also, the opportunities that these last two years provided us to improve our condition and the condition of those around us. . . Whatever the path 2022 takes us on, I am reminded in this moment of an old Zen proverb.

“The obstacle in the path becomes the path. Never forget, within every obstacle is an opportunity to improve our condition.”[1]

Essentially, life is full of obstacles and adversities. These challenges we do not choose, and therefore, we cannot control. However, what we can control is how we respond to these challenges. We look upon these challenges as opportunities. and we will continue to adapt to the changing market conditions in order to preserve and grow our clients’ wealth in a responsible and prudent manner. Whether the obstacle be large or small, we are turning the obstacle into an opportunity for action. My team and I look forward to serving you in 2022 and thank you for your commitment.

Until next time, stay safe and be well.

Corrado Tiralongo
Chief Investment Officer
Counsel Portfolio Services | IPC Private Wealth


[1] The Obstacle is the Way, Ryan Holiday, Penguin Group, 2014

*Source: Morningstar Direct Series F versions. For Counsel Global Real Estate and Counsel Global Small Cap, Series F 1-year returns as of December 31, 2021. For complete performance details, please see the following page.