Five themes that defined stock markets this year and may do so again in 2022

This time last year, your average strategist might not have noticed that the world’s best-performing index would be Mongolia in 2021, or that movie theater chains would deliver nearly 1,200% returns.

And while most analysts had predicted a rebound after the pandemic-induced recession, some predicted a rapid pace of rally that has seen European and american stock for a gradual record of, or a recent decline after the emergence of omicron type of Covid-19. Even less had predicted a slowdown in China or a liquidity crisis affecting the country’s developers.

Much of what’s happened in the stock markets this year pertains to specific circumstances: It was the worst time ever if you put your dollars in Turkish stocks, with the country’s idiosyncratic approach to inflation sending the lira into the abyss. ; It was the best time if your love for South Korean television prompted you to invest in Bucket Studios, which owns a stake in the agency representing Squid Game lead actor Lee Jung Jae.

Despite such special cases, there were broad themes defining the market this year. And even though the predictions may turn out to be horribly wrong, you should probably keep an eye on these themes for 2022:

COVID-19

Pandemic growth has been the market’s main driver for nearly two years, leading to a crash in 2020 and then a sustained rally on the back of vaccination programs that allowed an economic reopening. And now concerns about the Omicron variant have sent ripples through the world stock index.

Most strategists expect the virus to become a sidenote next year, as the advent of anti-viral pills from Pfizer Inc. and Merck & Co. have added to humanity’s arsenal against the deadly infection. This majority view has not changed in the face of warnings that the new strain may not respond to existing treatments.

Still, if there is one thing the pandemic has taught us, equity strategy is one thing, and epidemiology is another. And even if the virus does become an endemic nuisance, the roller-coaster of restrictions to isolate those infected “is turning into a more persistent drag on growth,” said global chief for equities at Fidelity International. said investment officer Romain Boscher.

Even if the virus disappears from our lives, it will likely define the direction of the stock market, as there will be no further grounds for fiscal and monetary stimulus – among the main drivers of this year’s enthusiasm. Give from

inflation

The market saw rising prices this year, and for good reason, soaring corporate earnings proved that companies can pass higher costs on to a consumer who is prepared to spend.

If inflationary pressure eases in the coming months, don’t expect a relief rally, because that’s what stocks are worth. “Having its tentative inflation cake in 2021, the market cannot get to eat it again,” Goldman Sachs Group said. Inc. U.S. strategists Dominic Wilson and Vicki Chang wrote in a note.

If price pressure persists or intensifies, things could get tricky. The stock is only a good hedge against inflation up to a certain point, which is ranked by Oddo BHF, WallachBeth Capital and Lombard Odier at 3% to 5%. According to Florian Ilpo, Head of Macro and Multi Asset at Lombard Odier, a sustained price increase of more than 4% will destroy stocks with gains and losses.

High inflation will also pressure central banks to tighten policy, thus increasing the cost of borrowing in highly indebted countries, such as Italy, and reducing market liquidity. Federal Reserve chief Jerome Powell shed first blood last week, warning about the potential for a sharp reduction in asset purchases.

Morgan Stanley’s Graham Secker says the impact of the European Central Bank’s potential tapering on peripheral European debt is one of next year’s biggest downside risks, while strategists at JPMorgan Chase & Co. A sharp turn was given as a significant downside.

decarbonization

One reason that inflation may remain structurally high is the transition to climate neutrality, a goal to which the world’s largest economies – from the US to India – have collectively committed this year. High carbon prices and environmental taxes increase production costs for industries, while low investment in fossil fuels has contributed to increased energy costs that threaten to curtail growth and stifle production.

On the other hand, asset managers at Nuveen from BlackRock Inc. say that decarbonization creates unprecedented investment opportunities. Look no further than electric cars, for example: Tesla Inc.’s stock has soared more than 1,000% since the beginning of last year, while Rivian Automotive Inc.’s market value briefly exceeded $100 billion since its trading start last month. has been exceeded, even though its sales are essentially non-existent.

With Europe’s biggest economy now in government with a Green Party government, decarbonization could boost stocks after a fall this year for the likes of Siemens Gamesa Renewable Energy SA and Vestas Wind Systems A/S.

metaverse

The rebranding of Facebook drew attention to the growing space for economic activity outside the physical world, from social media to gaming platforms. Chipmaker Nvidia Corp and video-game company Roblox Corp are stocks that have risen for a short time after rebranding a company co-founded by Mark Zuckerberg as Meta Platforms Inc.

According to Tim Sweeney, chief executive officer of Epic Games Inc., the metaverse — the digital world where users can socialize, play games and trade — is a billion-dollar opportunity.

Already, a digital model of the Gucci bag, which can only be used in the gaming platform universe, could cost more than the physical version. This is because, according to Morgan Stanley, people in the developed world now spend more time online than interacting in physical spaces. While the move accelerated with stay-at-home orders during the pandemic, it is projected to continue in the coming years, and when Apple Inc. party, it can get really close.

China

Beijing this year took dangling measures to curb profits from technology giants and tuition firms, and banned lending to real estate developers to reduce its reliance on the sector. At the same time, factory-gate price hikes made it difficult for companies to maintain profit margins, while the lack of any significant easing measures by the country’s central bank in recent months has dented economic growth.

Offshore Chinese stocks in Hong Kong are among the world’s worst performers this year, while the Nasdaq Golden Dragon China Index is down more than 50% from its February peak. The MSCI China Index is near its lowest since 2006 versus global stocks.

Still, many global institutions are getting more creative on Chinese stocks.

BlackRock observes that the peak of regulation has passed and expects more pro-economy measures to start taking effect in the new year, while BNP Paribas predicts Beijing will adjust its policies towards real estate developers The month will support the private sector in a major economic meeting. ,

“We believe the timing of the situation is now,” Lucy Liu, portfolio manager at BlackRock, said at a briefing on November 23.

Goldman Sachs is bullish on investment opportunities associated with President Xi Jinping’s “common prosperity” campaign, such as renewable energy. And UBS Group AG says the tighter regulations are priced in, while corporate earnings and valuations are set to improve.

There is more…

Staying on top of these topics will not guarantee meaningful returns for investors. Potential black or white swan events are lurking everywhere: from the US midterm election to the French presidential election, and from tensions in Taiwan to a full-blown crisis in the Turkish economy after the lira sank. Supply chain bottlenecks will be closely monitored, while global warming is another wildcard that traders may need to consider.

So it should come as no surprise that there is no consensus among the world’s foremost strategists about the direction of equity markets: while Max Kettner of HSBC Holdings plc encourages investors to start pulling the plug on stocks in the first half of next year. recommend, and watch things shine. In the second half, UBS Global Wealth Management predicts just the opposite – a good start and then a deteriorating outlook towards the end of the year.

While Goldman Sachs sees markets bullish next year, Bank of America Corp takes an all-out approach, predicting low or negative, and volatile returns in any case, in 2022.

And if we’ve learned anything from 2021, it’s that focusing on the fundamentals of the companies you invest in isn’t always the most beneficial strategy. By ignoring such fundamentals, some retail investors made serious money last year, with AMC Entertainment Holdings returning nearly 1,200% and Gamestop Corp. returning more than 800% for no apparent reason, fueled by social-media. was more than a whim.

Going forward, Goldman Sachs advises investors to be selective, avoiding firms with high labor costs and stocks valued solely on expectations of long-term growth. But then the same strategists gave advice last year.