Off the back of the RBA’s release of its Quarterly Statement of Monetary Policy, we share our domestic economic outlook, speaking to the inflation and interest rate outlook and the implications for asset markets.

While January saw the largest equity correction since the dramatic March 2020 COVID sell-off we explore our view that the recent pullback is more likely to be an overdue correction than the front end of a bear market. We unpack the signposts we use for assessing corrections versus bear markets.

As we observe a friendly policy backdrop turning less friendly in 2022, in our quarterly asset allocation report we detail our 2022 outlook and provide the macroeconomic backdrop to our investment view. We continue with a moderate overweight to equities, an underweight to fixed interest, and an overweight to alternatives. We have increased our weighting in emerging markets (from neutral) by marginally increasing our US equity underweight. We have also edged up our Australian equity overweight given the size of the local pullback in January.

Against a predicted backdrop of robust global growth and a significant re-acceleration to above-trend growth in Australia, we share our view and positioning on each of the key asset classes into 2022.

The US market continues to defy the naysayers with another impressive year of performance. The S&P500 has risen 24% YTD total return (31% in A$), a return that is comfortably ahead of both the rest of world equities and our local market. Outperformance has been skewed toward the second half of the year, helped by strong performance from big cap US tech as well as a resurgent US$.

The emergence of the Omicron COVID variant alongside a more hawkish pivot from the US Fed has raised uncertainty levels a notch as investors head toward year-end.

With a surge in case numbers in Europe signaling the start of a potential 4th COVID wave and cases on the rise in the US we assess the economic and market impact, and assess how Australia is likely to comparatively fare.

At present, we believe gold holds a degree of appeal in a portfolio context as cash and fixed interest offer very low yields. We outline the rationale for an allocation to gold allocation given the prevailing backdrop of very low interest rates, elevated equity markets and asymmetric inflation risk.