January 2022 - “When the facts change, I change my mind. What do you do, sir?” (Keynes)
In December, markets were back and forth all month long, as sometimes investors were concerned over Omicron spreading worldwide, and sometimes it seemed they reassessed the risks related to this new variant, as it appeared to be less severe than the Delta strain.
For a second year, Christmas and New Year celebrations took place within travel restrictions, as we enter the third year of the pandemic.
But despite this strange end of year, swinging between an Omicron sell off and a Santa Claus rally, overall, it’s been another positive year for developed markets’ risk assets. On the other hand, investment grade bonds were mainly sold off, with the US Treasury yield ending the year 50% higher from where it started. Among equity sectors, the big winner of the year was definitely the energy sector which converted 2020’s losses into the highest earnings in years.
During the last Fed meeting of the year, Chairman Powell removed ‘transitory’ from the Fed’s official statement and neither Omicron nor the bad November jobs report was a game changer in terms of policy. Indeed, the ultimate goal seems to be now the battle against the inflationary pressures, since they are now expected to be higher and stickier than anticipated, mainly due to demand and supply imbalances. So, unsurprisingly, the Fed took a hawkish turn last month, and the tapering pace has been doubled. This process should end by March, opening the way to an eventual, much predicted, rate hike. Altogether, three rate hikes in total are expected in 2022. The question is now if an interest rate of 1% will be enough of a tool to fight inflation, whose rate reached 6.8% in December, the highest level seen since 1982.
Similarly in Europe, the new wave of Corona didn’t change the ECB’s plan to taper. However, unlike the Fed, the ECB will remain very supportive through its Asset Purchase Program and no rate hike is to be expected until year’s end since Chairwoman Lagarde still sees the inflation as temporary.
As for China, it has been the big loser of the year. The property developers’ debt crisis is still in a state of extreme confusion and the contagion effect of Evergrande is hugely impacting the whole Chinese financial system. Also, the economic situation is not improving and once again retail sales disappointed, showing signs of consumption weakness and staying below pre-pandemic levels. Therefore, in order to boost the recovery, The People’s Bank of China cut its loan rate for the first time, since April 2020, from 3.85% to 3.80%. We expect more easing to come in 2022, putting the world’s second largest economy on the complete opposite direction than the rest of the world. On top of that, on a geopolitical matter, President Biden officially announced that he would not send any diplomatic representation to the Winter Olympic Games in Beijing next month, due to human rights issues.
From our side, with inflation still around we continue to favor value companies, as we think they will continue to outperform growth companies in 2022. Within value, we feel that US Banks should have another great year, benefitting from higher rates. Within tech exposure, Metaverse could be the hottest topic of the year.
If 2021 was a rebound year in terms of companies’ earnings and economic growth, 2022 is expected to be a year of ‘normalization’, with a strong focus on Corona’s new variants, supply chain issues, inflation, interest rates and tax hikes and more potential events to come related to the new generation of investors. But after two years of “Black Swans”, we must be able to adapt, and like Keynes said it well, it means reassessing our allocation when facts change. Having said that, we must not underestimate the markets’ resilience (and especially the US’ one) and therefore, every downturn could be an opportunity to buy the dip.
As always, risk-management combined with rigorous sector and geographical diversification will remain key factors for investment performance.
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