Inflation and rate hikes have arrived while the world remains mired in the pandemic, all making for a troubled start to 2022.
The US and Europe had begun an economic and corporate recovery, before the Omicron variant knocked them sideways again.
China’s political crackdown on homegrown businesses has got financial experts worried, though they say the country is still a buying opportunity and on course to become the world’s dominant economy.
They give their take on how events might unfold in the year ahead below.
US prospects: Rate hikes are on the way, and markets remain expensive
The US: Growth stocks could take a hit from rate hikes
The US economic recovery will have a major say in our fortunes in 2022, according to Interactive Investor’s head of markets Richard Hunter.
‘There have been instances of pent-up demand being released when restrictions were lifted, a “feel good” factor on a commercial and social basis, and some kind of return to normality,’ he says, and likens the US experience to that of the UK.
‘Less positively, recent supply chain blockages are choking supplies, raw material prices are therefore rising and inflationary pressure is becoming entrenched.
‘At the same time, accommodative monetary policy and government help schemes are coming or have come to an end, leaving economies to stand on their own feet for the first time in quite a while.’
Ben Yearsley, investment director at Shore Financial Planning, says the US has been expensive for the past four to five years.
‘In the short term there probably isn’t anything to knock the US market significantly.
‘However with growth stocks on “never never” even small interest rate rises have the ability to take the froth off the top.
‘It feels as if the US has most to lose from rate hikes, whereas the likes of the UK with a big financial services sector will be more insulated.’
Yearsley nevertheless says it still feels like we are in a bull market, and US markets are likely to continue rising.
‘Looking forward is more interesting than looking back though and there are some different trends at play that in my view mean the US won’t be the stock market of choice for the next decade despite many of their companies remaining globally dominant.’
Europe: Presidential election looms in the spring in France, and an upset could hit markets
Europe: Corporate profits have soared but clouds are gathering
Europe is entering 2022 with an abundance of strength in terms of demand, says Martin Skanberg, European equities fund manager at Schroders.
‘Corporate profits have soared and there is a wave of investment coming as companies reconfigure their supply chains and pivot to sustainable technologies.
‘However, there are clouds on the horizon. There is the prospect of higher inflation, higher interest rates, and potentially a very different investment landscape, especially towards the end of the year.’
Skanberg doesn’t think the current rise in Covid infections is likely to cause widespread disruption or to halt the recovery.
‘Corporate profits in the eurozone are forecast to be up by about 50 per cent year-on-year for 2021 and growth of 8-9 per cent is expected for 2022,’ he says.
‘Demand has so far been sufficiently robust that many companies have been able to raise prices to offset rising costs.’
He believes the current strong momentum in shares will continue into the early part of 2022, and further mergers and acquisitions could add extra impetus.
But he notes the risks posed by inflation and central bank action – or inaction – could build as the year progresses.
‘We could also point to geopolitical risks,’ says Skanberg. ‘Tensions between the US and China could flare up again, but there are risks closer to home as the migrant crisis on the Belarus-EU border shows.
‘The French presidential election in April will also be closely watched by investors. Stock markets generally are at elevated levels so a geopolitical shock could easily cause a pullback.’
Sam Morse, portfolio manager at Fidelity European Trust, says: ‘Despite the chaos that Covid-19 has caused, 2021 has actually been a good year for continental European equities.
‘We have seen a record number of European companies reporting positive earnings revisions. A natural outcome of these positive trends is that there is now significant optimism priced in to share prices.
‘Valuations in some areas do look stretched, particularly in more cyclically-exposed sectors that have enjoyed a strong rebound over the year.
‘One potential risk is that any small misses by businesses could spook the market and spark a disproportionate decline in share prices.
‘We must also consider the well-documented pressures on supply chains and the inflationary pressures that this is placing on households and businesses.’
Political crackdown: Chinese tech platforms will be expected to contribute to common prosperity
China: Worrying developments in the tech and property sectors
‘China’s regulatory crackdown was one of the more interesting non-Covid stories of 2021,’ says Ben Yearsley of Shore.
‘It caught many by surprise and the share prices of the big internet stocks are still down.
‘I’m not sure who was investing in China though who didn’t consider regulatory risk and politics a threat? Experts appear split on whether China is a buying opportunity or not. For what it’s worth, I think it is.’
Guy Foster, chief strategist at Brewin Dolphin, says two factors are currently weighing on Chinese returns.
‘One has been the underperformance of Chinese technology companies. Most of these are listed in the US through variable interest entities, held via American Depository Receipts.
‘The selling has accelerated as the prospect of delisting in the USA and relisting in China has been raised, specifically by Didi.’
Foster reckons relisting should have little fundamental impact on the companies, but that the long-term outlook is challenging for Chinese tech platforms as they are now expected to contribute towards common prosperity in China.
He says the second weight dragging the Chinese equity market lower is real estate.
‘The sector will likely suffer repeated bad news going into 2022, while more help will be offered to the banking sector to prevent a wider financial crisis.’
Richard Hunter of Interactive Investor says: ‘China is still on course to become the world’s largest economy at some point in the next decade.
‘This year has been marred by events such as those at Evergrande in the property sector, slowing economic growth and increased regulation.
‘At the same time, China’s relationship with the US remains a fractious one and any further mutual sanctions will inevitably both dent sentiment and limit increases in the amount of trade between them.’
Asia beyond China: Valuations are reasonable in many markets
‘It feels as if Asia has been treading water in 2021, with many markets not benefiting from a Covid recovery bounce, with some notable exceptions such as India and Vietnam,’ says Ben Yearsley of Shore.
‘You’ve also had China’s regulatory crackdown impacting sentiment. Valuations are also reasonable in many markets, which is why Asia is the region to watch for 2022.’
Nitin Bajaj, portfolio manager at Fidelity Asian Values, says: ‘Over the last few years, the valuation differential between large growth stocks and small value stocks had reached an extreme last seen in tech bubble of 1999/2000.
‘Hence, there was an expectation that investors would rotate out of growth stocks and into value names in the hope that value would benefit from an economic recovery.
‘This has played out in the Asian large-cap space so far in 2021, but not to the extent we expected in the Asian small-cap segment.’
Bajaj notes many small-cap value stocks continue to trade at significant discounts relative to large and small growth companies.
‘Our sense is that we may have quite a way to go on this journey as historically small-cap value stocks, in aggregate, have had a good track record of growing earnings faster than small-cap growth stocks.’
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