By Alessandro Albano and Francesco Casarella
Investing.com - Lockdown, recovery, then Omicron. 2021 in the markets has been a seesaw of events that have marked the choices of investors, with perhaps more than anything else the return of inflation and the pending decisions of central banks weighing on those choices.
Upstart (NASDAQ:UPST) digital coins like Dogecoin and Shiba Inu, and meme stocks like GameStop (NYSE:GME) and AMC (NYSE:AMC) have revolutionised, for better or worse, the way markets are operated, bringing to the fore unexpected protagonists (the so-called Redditers) who, a bit like David against Goliath, have tried (and failed) to have their say in a market that was too big for them.
Fed Chair Jerome Powell, ECB President Christine Lagarde, and peers have dominated the headlines, which hung on the thread of an adjective, 'transitory', which has never before assumed such a central significance in the markets and in investors’ minds like it did this year, reaffirming that in the era of quantitative easing, communication is the most strategic tool in the toolbox of bankers.
So what are the most important issues awaiting investors? And will 2022 bring us a gradual return to both financial and social normalcy? "On traders' minds are questions such as inflation and whether it is transitory or not, likely rate hikes by major central banks, and whether high prices for risk assets, be they equities, corporate bonds or high yield, are really sustainable," says MG Capital, setting the table for what might be ahead.
2021 Markets Recap
2021 was undoubtedly a good year for the major asset classes. Commodities, buoyed by the end of lockdowns, reopenings and a very strong economic recovery, posted strong performances. The CRB Index (PA:CRB) has risen by more than 35% since the beginning of the year. Rising inflation, allowed to linger thanks to the Central Banks, which initially considered it to be "transitory" before reconsidering their position in the latter part of the year, provided valuation support for these commodities.
However, we must make a distinction between the various commodities, because not all have performed positively this year. For example, among the precious metals, gold and silver in particular have undergone a drop, unlike energy raw materials, oil most of all. It’s worth noting that while historically gold is considered a safe-haven asset especially in periods of high inflation and thus works well especially in cases of very high and lasting inflation, it seems that at the moment we are in only the initial phase of this phenomenon.
On the bond side, on the other hand, it has been said for years that those who own bonds are destined to suffer heavy losses, mainly due to an increase in rates. We will (probably) see these interest rate rises in 2022, starting with the Federal Reserve, but 2021 is closing with stable spreads across Europe and bond yields that fell in the first part of the year, though they have managed to recover during risk-off periods (for example in November). Overall, looking across the various bond asset classes, the investment grade category is down around 1%. Emerging market bonds are suffering the most (10%+ decrease for those in local currency, according to Eaton (NYSE:ETN) Vance), and remain under pressure due to the strengthening of the US Dollar, which represents a large part of their debt currency.
Finally, with regard to the stock market, here as well many bears were disappointed. The thesis went that: "If the stock markets rose in 2020 despite lockdowns and economic shutdowns due to Covid, then markets will certainly collapse in 2021". Once again, however, the bull market that has lasted practically since 2009 (if we call March 2020 a correction, even if a severe one) has continued on its path, hitting brief bumps but climbing more or less constantly, again rewarding investors who avoided market timing and stuck with the market.
What to Do in 2022
It's not possible to have a crystal ball, but in its annual investment outlook, Amundi says that "investors should start the year with a prudent/neutral allocation (also considering high market valuations) and try to take advantage of relative value opportunities present at the regional and sector level."
For the French asset manager, it will be necessary to pay attention to "the illusion of nominal returns, aiming instead at real returns," while the classic 60/40 equities/bonds model portfolio, "will be put to the test." Indeed, the positive correlation between the stock and bond markets will require, Amundi's experts explain, "a more dynamic asset allocation," and rising rates will put pressure on "high-cost areas within growth stocks."
Stock selection should focus on companies with profits and “the power to pass on higher costs to customers, on quality, and on value securities," while Europe "should be favoured thanks to the Next Generation EU programme, with particular focus on ecological transition." 2022 should also see the return of emerging markets equities to the forefront.
The goal of investors, says Matteo Germano, Amundi’s Head of Multi-Asset and CIO Italy, must be "to aim for positive real returns and capital preservation." In the absence of alternatives, he adds, the stock market "remains privileged, but we must pay attention to areas with excessive valuations or exposed to rising rates, focusing instead on more discounted markets such as European and Emerging Markets, and the value segment. Now more than ever, diversification will be essential."
For analysts at Goldman Sachs Group, rising borrowing costs in different parts of the world will be one of the central themes for 2022, with earlier and faster interest rate rises "likely to support higher returns."
Swiss giant UBS Group, on the other hand, expects a "two-speed" 2022, with high growth and inflation rates in the first half of the year "favouring cyclical markets, such as the eurozone." However, they say the reduction in growth and inflation in the second half of the year "will boost defensive sectors such as healthcare," while the still-low levels of rates, yields and spreads "will push investors to follow different paths for returns."
"Looking further ahead," UBS adds, "the zero-carbon transition and advancing technological revolutions will represent the most important investment trends of the decade, through opportunities in greentech and sustainable solutions, as well as enabling technologies such as artificial intelligence, big data and cybersecurity.”