Top Global Views To Navigate Markets In 2022
After two years marked by disruption, loss, lockdown, and reopening, are we on the cusp of what UBS calls a ‘Year of Discovery’? Difficult, because the one thing all of us have realised about the new world order is that it has been nearly impossible to guess the future. Let’s face it, the era of predictable unpredictability is not going away. Within that framework, let’s try and draw out a possible economic and business outlook for the year ahead, for India and the world. Keep in mind, that while we write about the world at large, investors still have a large home bias. A UBS note asserts that investors across Europe, the Middle East, and Africa (68%), Asia (60%), the U.S. (53%), and Switzerland (44%) are picking their own market as the most attractive opportunity in the next six months.
UBS On The Global Picture
The Swiss bank expects global earnings growth of 10% in 2022. Within that, UBS sees cyclicals posting the highest earnings growth rates, given their greater sensitivity to economic growth. In particular, the UBS team likes the Eurozone and Japanese equity markets, global financials; and as investment themes—U.S. midcaps. The ‘value in the European markets’ view of UBS coincides with that of others like Goldman Sachs, which says that while valuations in most markets, such as Europe, Japan, and emerging markets, have come down this year, only the United States (and the world index—of which the U.S. makes up a lion’s share) are expensive.
JPMorgan On Policy Priorities
JPMorgan believes that with fiscal stimulus likely past its peak, longer-term spending proposals on infrastructure and other projects are now in focus. They cite U.S. President Joe Biden’s physical and human infrastructure programmes that plan to allocate trillions of dollars in infrastructure spending, high-speed internet systems, and clean energy, and fund other priorities such as childcare and healthcare; and the European Union Recovery Bill and Green Bill focus on research and innovation, digitisation, modernisation, and recovery, and place aggressive standards to address and fight climate issues.
In contrast to that action on both sides of the Atlantic, JPMorgan believes the policy stance is decidedly less supportive for investors in emerging markets.
Chinese policymakers have been on a campaign to rebalance growth drivers and restructure the economy, and over the medium term, investors will likely have to come to terms with the implications of slower structural growth in China. That state of operations may be more sustainable, JPMorgan says, but the transition presents near-term risks. In Latin America, a potential shift toward populism could have serious negative economic implications for the region.
Charles Schwab On Risks To The Market
Jeffrey Kleintop of Charles Schwab offers a useful reminder that the risk of surprises is not always to the downside, using the point of how while economies around the world were worse in 2020 than anyone had forecast, 2021 was different. Because, in 2021, most countries saw surprisingly rapid recoveries. Hence, the risk factors from Charles Schwab’s perspective are not necessarily skewed to the downside. The brokerage house believes that slower-than-expected interest rate hikes, China going from cracking down to propping up, Covid-19 waves not resembling those of 2021, geopolitical surprises, and shortages turning into gluts are the key risks.
Two points from the Charles Schwab note stand out:
Since markets tend to look six-to-twelve months ahead, they may soon begin to reflect the possibility that some shortages may have started to ease, and gluts may have started to form by the second half of next year. If key components become more available and finished goods output takes off, it may be welcome news for markets as a key driver of inflation pressure should ease and be accompanied by improving confidence in a slower tightening cycle from central banks. But it could also pose a risk to some industries that have thrived on the pricing boost from shortages.Jeffrey Kleintop, Charles Schwab
The omicron wave (and future waves) may pose a risk to investors, since they may not be unfolding in the same way in terms of Covid-19 cases or market leadership. For this most recent cycle, tech stocks have failed to make new relative highs to energy since the news of omicron broke (circled in red). One reason might be that the valuations of the lockdown leaders are now very high relative to reopening beneficiaries, providing less scope for the latest wave of the sector rotation.Jeffrey Klientop, Charles Schwab
Resonance to this Charles Schwab note comes from JPMorgan Private Bank, which says that while there are most certainly risks to be managed in the form of inflation, labour shortages, and a persistent global pandemic, it sees a strong foundation for a vibrant cycle ahead.
The global crisis has clearly shifted policymaker priorities, solidified household and corporate balance sheets, and accelerated innovation. This new reality may lay the foundation for a far more vibrant economic environment than the sluggish growth and weak productivity that characterised much of the 2010s.JPMorgan Private Bank
JPMorgan Private Bank’s belief seems to be that these changes could have important consequences for investors, especially those still positioned for a reprise of the previous cycle.
Credit Suisse Sees Asean Emerging Trumps
Credit Suisse states that it favours markets which the team expects will enjoy strong 2022 cyclical upturns, benefit from rising bond yields and inflation expectations, and trade at discounts to historical trends. The Asean bloc is Credit Suisse’s favourite due to cheap multiples, low foreign ownership, and bounce-back earnings. CS likes Korea’s sensitivity to inflation and adds that although it earlier turned positive on China's internet companies, it is keeping China underweight as a whole, as its cycle is more mature than the rest of Asia’s. CS has upgraded Japan from underweight to market-weight on cheap valuations and expected EPS gains from a stronger dollar.
Credit Suisse’s India View
There could be some hiccups in the near term. Credit Suisse believes that some de-rating could happen in equity markets worldwide, including India. However, the firm does not expect Indian equities to decline toward historical average P/Es any time soon. De-rating for Indian equities should be limited, the note says, given India’s improved macroeconomic and corporate fundamentals. While in the near term, Indian equities remain susceptible to FPI selling, in the event of further corrections from the December 2021 levels, risk-reward may start turning favorable for equity investors, according to Credit Suisse. The firm believes Indian cyclicals will outperform defensives like healthcare, and that the end of the rate cycle favors rate-sensitives (financials and utilities) at the expense of the export or commodity sectors (technology and energy).
Does Your Portfolio Suit You?
While all expert knowledge is welcome, every investor has got to ask oneself a primary question at the end of every year—are your assets earmarked for your lifestyle? Your legacy? Intended to grow in perpetuity? Or do you need access to them in the near term?
Keep your answers to these questions in mind as you assess the risks and rewards to your investments. Whether or not any of the mentioned risks come to pass, a new year almost always brings surprises of one form or another. Therefore, the key to successful investing is having a well-balanced, diversified portfolio, whose risk profile is consistent with your goals, and being prepared with a plan in the event of an unexpected outcome. As long as you beat your own goals, you have been in a bull market. Remember, as one market veteran said on BloombergQuint’s ‘Talking Point’: “There’s always a simultaneous bull market and bear market on somewhere in the world. It’s never a case that everything in the world is going up or everything in the world is going down.” Find that right market.
Niraj Shah is Markets Editor at BloombergQuint.