The Year of High Hurdle Rates and Lower Potential Returns
(and What To Do About It)
After a blockbuster and eventful 2021, we expect 2022 to be a little slower, both in terms of growth and market returns, but potentially equally as eventful. COVID-19 will likely still be with us. We should, however, increasingly move to a new normal, given the expanded medical toolkit now available to manage new variants and regional flare-ups, even while those may lead to occasional travel restrictions. We anticipate economic growth will slow and inflation will remain high in 2022. In this environment, investors will have a higher hurdle rate to achieve inflation-beating returns. For those looking to still achieve growth and realize returns that are above the inflation rate in 2022, we think there are six key investment opportunities to consider.
STRATEGIES FOR POTENTIAL HYPERGROWTH
INFLATION AND RATE SHOCK ABSORBERS
Earn extra yield by using options to monetize elevated volatility
While rates are likely to rise in 2022, for investors looking to earn a reasonable level of current income, rates are still not going to be high enough. Beyond real assets and private credit, investors may also look to the options market for additional income opportunities. Investors may sell a put option or a call option and collect a premium. Implied volatility is one of the biggest determinants of how cheap or expensive the options premium will be. What makes selling options attractive today is that, despite a reset to lower volatility throughout 2021, volatility levels are still elevated, relative to their pre-pandemic levels.
(1) Source: PitchBook, Q3 2021.
(2) Source: Coinbase, World Bank, Crypto.com, as of September 30, 2021.
(3) Source: Coinbase, World Bank, Crypto.com, as of September 30, 2021.
(4) Source: PwC, Time for trust: The trillion-dollar reason to rethink blockchain, October 2020.
(5) Source: Bloomberg, as of December 31, 2021. Note: 60/40 portfolio is comprised of 60% S&P 500 and 40% Bloomberg Aggregate Bond Index with 2022 expected returns of 10% for the S&P 500 and -2% for the Bloomberg Agg.
(6) Factset, as of December 30, 2021.
(7) Source: Bloomberg, as of December 31, 2021.
(8) Source: PitchBook, Bloomberg as of December 1, 2021. Note: $1.6 trillion represents the size/market value of the Bloomberg Barclays US Corporate High Yield Bond Index.
(9) Source: BlackRock, Inflation & Real Assets, 2021.
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