Market Drivers in 2022

COVID-19

It has been almost two years since a global pandemic was declared. The world now has a much better understanding of COVID than we did in March 2020, but there is little doubt the virus will continue to evolve and impact our lives in 2022. Fundamentally, we know that the vaccines tend to prevent serious illness and that, whilst the virus is seemingly becoming more contagious, it is at the same time proving less deadly. Vaccine uptake and the emergence of new strains will drive short-term market sentiment and markets are likely to continue to react both positively and negatively to the interim noise created by COVID news.

Central Banks and Inflation

Central Bank actions will play an influential role in 2022, particularly in the Fixed Interest (Bond) market.  Over the past 12 months we have seen a gradual pull back of accommodative government policy and support. Both the US Federal Reserve and the Bank of England have reined in economic support as levels of inflation have skyrocketed. With the anticipated rate of tapering only increasing, further action in relation to decreasing government support cannot be ruled out. Bond markets are likely to be volatile as this unfolds in real time (we are only in the first week of the year and we have already seen this in US bond markets over the past few days).

Value vs Growth

Throughout 2021 markets swung between favouring value investing over growth, and vice versa.

  • Growth investing: buying companies looking to grow their revenue and market share, and therefore their overall value
  • Value investing: buying companies at prices lower than their intrinsic value with a view to realising that value in the future.

These swings will likely continue in 2022. However, the speed at which the rotations occur means timing these changes is a tricky business. In this environment we continue to favour companies with strong balance sheets, high margins, low labour intensity, low capital intensity, and growing earnings.

Volatility

Whether it is due to COVID, Central Bank actions, inflation or geopolitical risks, we predict that higher levels of market volatility will persist throughout 2022. The good news is that heightened volatility should lead to greater market inefficiencies. In turn this presents investment opportunities.  When volatility is high, a diversified asset allocation with a focus on the long-term soundness of investment fundamentals is vital to a successful investment strategy. In other words, ignoring short term noise.

We believe we are in a transitionary phase, where investors are still grappling with certain aspects of the economic recovery as we gradually return towards something more like a pre-COVID environment. In the short term this does mean that certain investment styles can fall in and out of favour quickly, but it is important to remember that longer term trends do not play out overnight.

Source: Refinitiv – Market returns as at 06/01/2022