I've never had much time for forecasts, especially for something as unpredictable as financial markets. That said, people like me are paid to have an opinion, so here goes.
This year will be defined by what happens on the inflationary front. US inflation is at a 40-year high of 7.0 per cent, and we'll get an update on local inflation this coming week. The Reserve Bank expects it to hit 5.7 per cent, which would be the highest since 1990.
Based on my holiday conversations with businesspeople about the wage pressures out there, I wouldn't be surprised if it goes even higher in the months ahead.
It'll come down later in the year, but I'm not convinced inflation will fall quite as much as some might hope.
That brings us to interest rates, which I also think will keep rising this year. The Official Cash Rate (OCR) is expected to crack two per cent, up from 0.75 per cent today.
If the economy stumbles there's a case for pausing, but I just can't see it. Nobody wants a wage-price spiral, and with the labour market set to remain tight, I think the new "path of least regret" is to keep hiking rates and cool things down.
Conservative assets had a poor year in 2021. New Zealand Government bonds fell 6.2 per cent, the first down year since 2013, while corporate bonds slipped 4.2 per cent for their first negative performance since the 1990s.
I don't think 2022 will be as bad. The five-year swap interest rate surged from 0.5 per cent to 2.6 per cent last year, and while it'll go higher from here, the rise won't be of the same magnitude.
Further rises in interest rates will see bond prices fall slightly, but when income is added back corporate bonds will eke out a gain, in contrast to last year's decline.
I wouldn't say the same for government bonds elsewhere, such as in the US, where another year of negative returns looms.
World shares rose 19.0 per cent in 2021, the third year of double-digit gains and well above the 25-year average of 7.9 per cent. I think 2022 will be another positive year, albeit with much more modest returns.
I think we'll see valuation multiples marked down further, as higher interest rates make investors less willing to pay the same prices for assets.
Despite that, earnings growth of about seven per cent and a couple of per cent for dividends should offset that and see world shares return somewhere around that 25-year average, probably a little lower.
The winners and losers will look quite different. High-flying growth companies might face headwinds as liquidity is removed from the system, while some of the unloved regions and sectors could have their time in the sun.
Last year NZ shares were down marginally, with our market lagging world shares by the widest margin since 1998. We won't have a stellar year, but we'll be up in 2022.
There's a long list of economists who've got their housing market predictions wrong in recent years, so I'll be in good company if I'm off the mark with mine.
Mortgage rates increased sharply during the second half of 2021, and we're yet to see the full impact of that on borrowers.
Declines are rare outside of recessions, but I think there's every chance house prices fall slightly this year. Prices are up a staggering 45 per cent since the end of 2019, so there's no shortage of heat to come out of the market.
For all of that, I'm still expecting the domestic economy to hold up well, which should see the NZ dollar remain above historic averages. However, after weakening against the US dollar in 2021 I'd wager we push a little higher against the greenback in 2022.
Finally, it'll be a much rougher ride for investors. Since late 2020, US shares have only experienced one five per cent decline, which came in September of last year. That's unusual, as regular sell-offs are common even when markets are in an uptrend.
With the uphill grind set to become steeper, I think we'll experience a lot more volatility along the way this year.
Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.