People comparing very different choices use metaphors like “chalk and cheese” or “apples and oranges”. But these metaphors aren’t enough to contrast our world now to our world before Covid-19. It’s not chalk and cheese, it’s shifting between different universes.
Covid-19 brought uncertainty and knocked the global economy off course. Yet despite a nosedive in March 2020, investment markets have been generally well-behaved.
A dollar invested in the US market over the last three years has nearly doubled. Investors want to know whether the stellar run for shares will continue into 2022.
Think about the year ahead from different perspectives, with two key ones being economic challenges and investment opportunities.
Economic challenges set the overall environment and provide tailwinds or headwinds for markets. Standout challenges for 2022 are inflation, government debt and interest rates.
Inflation could completely derail over 20 years of relative price stability. Ben Bernanke, former chair of the US Federal Reserve, expects high inflation to be “transitory” and last only months. This looks increasingly unlikely as supply disruptions and labour market imbalances are set to go deep into 2022.
Investment opportunities for next year will be driven by themes including ongoing technological change and the trend to decarbonisation.
From healthcare to finance nothing is immune to change, with technology continuing to disrupt industries, business models and products.
Two weeks ago electric carmaker Rivian listed on the US stock market at a value higher than old established car companies like Ford and General Motors.
Consider this - Riven expects to produce only 1000 cars this year while General Motors sold nearly 7 million in 2020. Yet the challenger, Riven, is worth more.
The global move to decarbonise will accelerate in 2022 and laggards will increasingly be seen as higher risk investments. One in five of the world’s largest listed companies have already set a net-zero carbon target, including Microsoft, BP, Visa, Unilever and Apple. Even cigarette maker Philip Morris is striving to achieve carbon-neutrality across its factories by 2030.
Driven by regulation, consumers and investors, more business leaders will take action and we’ll see a number of net zero targets set by New Zealand listed companies.
It’s tough making sense of the year ahead as an investor. We should expect lower returns for global equity markets next year, but it is not a given that shares will have a down year. In the 20 years immediately preceding this year, the US share market delivered a negative year only 4 times, being once in every five years.
But remain mindful that investing is about risk as well as returns. With rising uncertainty, now is probably not the time to overload on risk taking.
Times of uncertainty call for flexibility in investment portfolios. This may mean recognising the value in having money accessible for opportunities or for rebalancing. Also be aware of the time required to turn different assets into cash. And with ongoing interest rate rises hurting global bond markets, understand how bond values are sensitive to interest rate changes.
In short, risk is rising as we head into 2022. Make sure you’re ready for the new year as an investor by being forward-thinking and agile.
(This article was originally published by Stuff November 25, 2021) (Picture Source: Mika Baumeister)
Residential property: a lesson from China
By John Berry on | 3 min. read
Dynamics of residential property in China are very different to ours, but their market may have useful lessons.Read more
Interest rate hikes: Is your portfolio really conservative?
By Hamesh Sharma on | 3 min. read
As a period of record low interest rates draws to a close, bond investors may be in for more short term pain said Hamesh Sharma, portfolio manager at Pathfinder.Read more
Social entrepreneurs: a new force for good
By John Berry on | 3 min. read
Future-thinking businesses are coming up with innovative new models to support causes and embed “doing good” in their company’s DNA.Read more