2022 outlook Cash: as much as necessary and as little as possible

Interest rates are still barely moving, and inflation must be taken into account. Nevertheless, optimism is warranted for 2022.

by Daniel Kalt 24 Jan 2022
Image: UBS

The Swiss economy has recovered well as the third year of the pandemic begins. At the turn of 2021/2022, it had already reached a higher level than before coronavirus. The US economy has been a global pioneer, while the eurozone and the United Kingdom are still lagging somewhat behind. The slump was felt more strongly there than in Switzerland, for example. Yet the global economy is in catch-up mode everywhere. It can be assumed that it will gradually become possible to get the pandemic under control, be it through successful vaccination campaigns or new drugs.

The bottlenecks in various supply chains, which intensified in the second half of last year, are primarily a consequence of the rapid global upturn. These bottlenecks have in turn led to a significant rise in inflation. For inflation to last or even increase, however, services and wages would have to be affected in addition to imported goods and commodities. There are no signs of such a trend at present. UBS’s 2022 Compensation Survey shows that a wage-price spiral, i.e., an inflation-driving build-up effect between wage and price increases, is unlikely. While inflation in Switzerland stood at 0.6 percent in 2021, UBS values it at 1 percent in the current year and expects it to drop back down to 0.6 percent in 2023.

Loss of purchasing power for high cash holdings

Even if inflation levels remain moderate, combined with persistently low interest rates around or below the zero percent mark, they are leading to a steady loss of purchasing power for cash holdings. This applies not only to cash in savings accounts, but now also to many bonds.

When it comes to cash holdings, investors should therefore follow the principle of “as much as necessary, as little as possible.” The chances of positive returns are currently highest when financial resources that go beyond a sensible safety cushion are reallocated to investments that yield returns. Since this is only possible by accepting fluctuation risks, these investments should be broadly diversified and based on a clear investment strategy.

A clear view with the UBS Financial Check

In the course of this free consultation, you will receive practical tips that are fully tailored to your financial goals. You can then decide which tips you want to follow up on.

Your risk profile and investment horizon as the basis

Your risk profile and time horizon are the key elements of a clear investment strategy. The former is based on your asset situation, risk tolerance and risk capacity. The investment horizon describes the period during which the money is not needed. The longer the period, the higher the risks you can take. This is because price fluctuations even out over a longer period of time. Regularly rebalancing investments, i.e., periodically reviewing the components of your portfolio in line with the defined long-term strategy, is also extremely important.

High profit trends

A question that is heard again and again in connection with investments in equities is whether the markets are already overheated and you’ve missed the “right time” to invest. The general, strategic answer is given by the averaged cost effect: if you invest at regular intervals, you won’t miss the best moments to do so and, with a sufficiently long investment horizon, you won’t have to worry about the right time to enter the market.

Based on the current market analysis, the projected profit growth of listed companies in 2022 is 30 to 40 percent higher than before the pandemic. This means that the value of a share may well continue to rise and remain reasonable.

The opportunities of the CO2-neutral economy

By all accounts, the shift to a CO2-neutral economy is emerging as one of the most significant investment trends of this decade. Investments in the areas of greentech, clean air and CO2 reduction are therefore very interesting in 2022, as are CO2 emissions trading strategies. The healthcare and cybersecurity sectors also offer particular investment opportunities.

Investing sustainably in growing financial sectors

What are the benefits of sustainable investing? And how do you invest sustainably? Questions and answers about sustainable investing at a glance.

Anyone who wants to make the most of sustainable company trends should keep an eye on mid-cap stocks, as fundamentally new technologies often come from this type of company. And disruptive technologies are just as defining for this decade as the CO2-neutral economy. In addition, shares in mega-caps, i.e., the world’s largest technology companies, often react more strongly to interest rate rises than those in mid-caps.

Gold – a crisis hedge dependent on the dollar

Alternatives to investing in equities with the prospect of comparable returns are not easy to identify for 2022. Real estate, and therefore also real estate funds, have generated good returns in recent months, but have become very expensive due to low interest rates.

Gold, like other precious metals, is a crisis-hedging vehicle, but does not yield interest and is quoted in US dollars. This can lead to a situation where, if the price of gold rises, the gain is reduced or wiped out by a falling dollar exchange rate. In short, there is virtually no way to avoid a clear investment strategy or the stock markets when seeking profitable investments in 2022.