Inflation, green energy, virus: What to watch in stocks in 2022

Pandemic developments have been the market’s main driver for almost two years, causing a crash in 2020 & then a sustained rally on the back of vaccination programs

By Nikos Chrysoloras, Jeanny Yu, and Thyagaraju Adinarayan

A year ago, the average stock strategist may not have seen that the world’s best-performing index in 2021 would be Mongolia, or that a movie theater chain would rise 13-fold.

And while many were bullish, few predicted the sheer ferocity of the rally that pushed European and US stocks to successive records, or the dip after the emergence of the omicron variant of Covid-19. Even fewer had forecast the slump in China or the liquidity crisis affecting the nation’s developers.

In short, it was a year of surprises -- that was the least surprising thing about it. Getting the details right in 2022 will be no easier -- but a few broad themes are likely to persist.

Covid-19

Pandemic developments have been the market’s main driver for almost two years, causing a crash in 2020 and then a sustained rally on the back of vaccination programs that allowed an economic reopening. And now worries over the omicron variant have sent ripples through world stock indexes.

Most strategists expect the virus to become a side-note next year, as the advent of anti-viral pills from Pfizer Inc and Merck and Co add to humanity’s arsenal against the deadly infection. This majority view hasn’t changed in the face of warnings that the new strain may not respond to existing treatments.

Even if the virus were to disappear from our lives, that would likely still define stock market direction, as there would be no further grounds for fiscal and monetary stimulus -- two of the main drivers of this year’s exuberance.

Inflation

Markets looked through surging prices this year, and for good reason, as soaring corporate earnings proved that companies can pass on higher costs to a consumer that remains willing to spend.

If inflationary pressures ease in the coming months, don’t expect a relief rally, as that’s what stocks have priced in. “Having had its transitory inflation cake in 2021, the market may not get to eat it again in 2022,” Goldman Sachs Group Inc. strategists Dominic Wilson and Vickie Chang wrote in a note.

Decarbonisation

One reason that inflation may stay structurally higher is the transition to climate neutrality, a goal toward which the world’s biggest economies -- from the US to India -- collectively committed this year. Higher carbon prices and environmental taxes increase production costs for industrials, while under-investment in fossil fuels has contributed to a spike in energy costs that threatens to dampen growth and disrupt output.

On the flip side, asset managers from BlackRock Inc to Nuveen say decarbonisation creates unprecedented investment opportunities. One needs to look no further than electric cars for examples: Tesla Inc. stock has risen more than 1,000 per cent since the start of last year.

And there’s more...

Staying on top of these themes won’t necessarily guarantee meaningful returns for investors. Potential black or white swan events are lurking everywhere: from the US midterm elections to the French presidential vote, and from tensions in Taiwan to a full-blown crisis in Turkey’s economy following the plunge of the lira. Supply chain bottlenecks will continue to be closely watched, while global warming is another wildcard that traders may need to consider.

It’s, therefore, no surprise that there’s no consensus among the world’s most prominent strategists about the direction of equity markets: while HSBC Holdings Plc’s Max Kettner advises investors to start pulling the plug on stocks in the first half of next year, and sees things brightening up in the second half, UBS Global Wealth Management predicts exactly the opposite -- a good start followed by a deteriorating outlook in the back end of the year.

While Goldman Sachs sees markets grinding higher next year, Bank of America Corp. takes a rather apocalyptic view, predicting low or negative, and in any case volatile returns in 2022.

And if we learned anything from 2021, it is that focusing on the fundamentals of companies you invest in isn’t always the most rewarding strategy. By ignoring such principles, some retail investors made serious money last year, with AMC Entertainment Holdings up about 1,200 per cent, and GameStop Corp returning more than 800 per cent for no apparent reason other than a social-media fueled craze.

Going forward, Goldman Sachs advises investors to be selective, avoiding firms with high labor costs and stocks valued entirely on long-term growth expectations. But then again, that’s just what strategists advised last year.

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