As has been the case for the past couple of years, we’re ending 2021 with as many questions as answers.

On the surface, economic conditions seem to be improving, at least in Canada. National unemployment dropped to six per cent in November, the economy began to grow again after some coronavirus pandemic restrictions eased and the oil price has risen from its lows.

However, inflation is as high as it’s been in a generation — in October, the inflation rate hit 4.7 per cent in Canada and 6.2 per cent in the U.S. While interest rates remain very low, they’re expected to increase, government debt continues to grow and a new coronavirus variant, Omicrom, has us learning the Greek alphabet daily.

Read: Majority of global institutional investors expect interest rates to rise in 2022: survey

Despite all of this, public equity markets have hit new highs, returning well in excess of 20 per cent on average at the time of writing this article in early December. In anticipation of rising interest rates, bond yields have risen, with long bonds returning negative 7.9 per cent to the end of November.

It just hasn’t gotten any easier for institutional investors wondering how to position their portfolios. They may be thinking: “Do I raise cash to take advantage of an equity market correction? Do I need to worry about inflation and, if so, what is the ‘matching’ asset? Should I continue to move into illiquid assets such as real estate, infrastructure, private debt, private equity etc., even though there seems to be so much money allocated there?”

In addition to determining their desired level of risk, investors should also be considering whether they’re building a portfolio for expected returns or worst-case returns. In the case of inflation, real assets, certain commodities and — depending on the regime — equities and inflation-linked bonds can all provide some protection. The real issue is whether inflation is going to be different than market expectations and which of these asset classes performs best in the forecasted economic environment.

Read: Expert panel: Inflation risk — to hedge or not to hedge?

While private market strategies appear as expensive as equities, opportunities remain to invest in these asset classes, particularly if the investor is willing to accept more risk in value-added strategies. Choosing an experienced and proven partner is especially important given all the uncertainty that remains around markets and the economic environment.

The past few years have been very difficult for institutional investors to navigate — 2022 is shaping up to be more of the same.