Reading The Tea Leaves: Investment Themes For 2022
What are the dominant themes for investing in 2022? Let's take a look at where to from here in 2022.
Written by Victoria Kent, Senior Investment Specialist
This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
The human race has been failing to predict the future for as long as we have existed. Nonetheless, we dare to do the impossible and predict which investment themes might dominate 2022.
Whatever your preferred prediction method – tea leaf reading, crystal ball gazing, or divination from the flight and cries of birds (aka Ornithomancy) – you’ve likely realised any attempt to see what lies in store for us is impossible. And that timing the market is therefore futile. The future is yet unwritten and all.
However, before we even make it to the end of March, there are political and economic murmurings, as well as legacy themes from 2021, that can indicate investment themes for the coming year.
Our CIO Kevin has written a detailed account of what went down in January 2022. To summarise, January was a poor month for equity markets. This was largely due to a variety of factors including: rising inflation fears, fears of Russia invading Ukraine, the prospect of increased interest rates, a 'post-pandemic slowdown' of some technology companies, and ongoing global supply chain shortages.
If the January Barometer theory is to be believed – the market theory suggesting returns in January predict those for the rest of the year – we are in for a bumpy year ahead.
Rising Inflation
To get the global picture, we have to look to our cousins in the U.S. Over the 12 months from January 2021 to January 2022, the Consumer Price Index for All Urban Consumers (CPI-U) rose 7.5%.
This is the largest 12-month increase since the 12-month period ending February 1982. Food prices increased 7.0% over the past year, while energy prices rose 27.0%.
Source: U.S. Bureau of Labor Statistics, 18/02/22
To tackle this, the Federal Reserve has signalled they will soon raise interest rates, and the market expects there will be several interest rate hikes this year and into 2023.
Here at home, we are also experiencing higher than expected inflation. Over the 12 months to the December 2021 quarter, the headline inflation rate was 3.5%. The most significant price rises were for new dwelling purchase by owner-occupiers (+4.2%) and Automotive fuel (+6.6%). As this is just over our target of between 2-3%, the Reserve Bank of Australia has also brought forward its expectations of interest rate rises to 2023.
What does this mean for markets?
Increasing rate rises tend to disproportionately affect the share price of growth companies. As more of their value – revenues, profits and cashflows – is further into the future, any jump in the discount rate used by investors can have a significant and negative impact on the short-term valuations investors are willing to assign to such businesses.
This is what we are currently experiencing in equity markets – where higher growth and smaller capitalisation stocks are being disproportionately impacted. This effect was particularly acute for stocks with prospectively high growth rates but lower (or loss-making) levels of profitability, with many early-stage technology companies, including many sustainable technology companies, significantly underperforming.
Some sectors within the stock market are more sensitive to changes in interest rates compared to others. Financial companies benefit from higher rates through increased profit margins. The energy sector has also notably outperformed recently.
For some, a rise in interest rates signals a return to lower-growth, ‘value’-style sectors outperforming. Value stocks are those that trade for a price that’s cheaper than its financial performance and fundamentals suggest it’s worth. A well-diversified portfolio should have a mix of both kinds of value and growth investments.
Oh, Omicron
According to Reserve Bank Govenor Philip Lowe, “the Omicron outbreak has affected the economy, but it has not derailed the economic recovery.” The Australian economy remains resilient and consumer spending is expected to pick up as case numbers trend down.
The RBA’s central forecast is for ~4¼% GDP growth over 2022, and 2% over 2023. From the border openings to double-vaccinated international travellers, all is welcome news to the beleaguered tourism industry.
One source of uncertainty is the sustained supply chain distribution networks disruptions, and their ongoing effects on prices. While we certainly hope this will ease as the year goes on, there does seem to be continued pressure on certain raw commodities, components, labour and logistics.
And speaking of labour, with the historically low levels of unemployment, labour shortages are a big issue for many industries (particularly lower paying industries). While the Omicron outbreak has been particularly hard for lower paying industries like arts and hospitality, the effects of staff shortages have been felt across the board.
Our Outlook
We can't help but continue to be a glass-half-full bunch, with our eyes on the long game. It's always unpleasant to see a temporary fall in the value of one’s funds, but one needs to look at the health of their underlying portfolio, and that should give one reasons for optimism and confidence.
Our investment thesis has always been companies which are a net benefit to society are more likely to prosper in the long run. As a result, investing sustainably maximises the chances of superior returns over the long term.
So, we remain calm, trust our thesis, and know whatever the future does hold, the path to wealth creation is often a bumpy one.