Daily Brief - 6 investing trends for 2022 (Jan 5, 2022)

It’s always exciting to plan ahead for the new year - and that certainly applies to investing.

Today and tomorrow we will review investment ideas for 2022. To begin, here are six trends that might impact your portfolio, ranging from COVID to geopolitics.

Pandemic: COVID deaths are on the wane

Source: https://covid19.who.int/info/

Omicron’s percentage death toll is the lowest ever at 1.5% of cases.

Whether thanks to wider vaccine adoption or waning virulence of the virus, a lower death toll will allow the “in-person economy” to grow again.

In one scenario, COVID will mutate to a seasonal light flu and life will slowly get back to normal. Old underperforming stocks will get back in vogue. Airlines, anybody?

In another scenario, the next variants will stay aggressive and lockdowns will come back. Underperforming stocks keep falling whilst tech stocks reach higher.

Markets: US equities have reached dot.com valuations

Equities have reached valuations comparable to the dot.com era, as shown by the P/E ratio of S&P 500.

One of the key factors in driving valuations higher has been the fall in bond prices: in the last 20 years falling bond yields led to higher equity valuations.

It stands to reason the opposite could hold true as well - so if inflation will force the hand of central banks one should expect valuation multiples to pause their expansion.

Crypto: Central Banks want a slice of the action

If you can’t beat them, join them.

A number of CBs are studying how to issue e-currencies that might, eventually, lead to fully demonetised economies.

Traditional banking payment systems will be challenged as smart currency contracts gain adoption - and Crypto as a whole will benefit from further legitimation by CBs around the globe.

Economics: inflation to moderat

We have often mentioned the theory of the growth impulse: how large changes in growth appear to ‘cause’ similar shifts in inflation 12-18 months later.

The impact of the growth snap-back from the 2020 lockdown is - arguably - one of the drivers of the current inflation rise and its effect will fade going forward.

The bullish case sees inflation retrace from 6%. Central Banks can unwind their balance sheets with ease, the bull market is protected.

The bearish case sees inflation stay stubbornly high. CBs go back to the good ole handbook and hike aggressively, resulting in a slowdown if not even a recession.

Geopolitics: Republicans to take the House

With Biden’s approval ratings falling drastically in Q4’21, it is likely that Republicans will hold sway during midterm elections.

A weaker presidency will have less power to push through legislation like BBB, leaving once again the burden of propping the economy in the hands of the Fed.

Higher chances of a Republican President might actually be well received by markets, as a sign of a more business friendly environment.

Geopolitics: China-US frictions to increase

Biden assured Ukraine’s leader of ‘decisive’ US response to any Russian invasion. Obama made the same noises about Crimea - so one can forgive the Ukrainians for a healthy dose of scepticism.

This conflict might provide an interesting data point for China: if Russia can grab land and nobody takes action, then China will feel emboldened about its plans for Taiwan reunification.

In one scenario, Putin grabs a piece of Ukraine and NATO and Europe do nothing. China sees it as an opportunity to become assertive with Taiwan. US intervenes and markets begin to seriously worry about US-China conflicts.