A look back at the markets of 2021 and we ask what 2022 will hold

As we look back at the markets of 2021 and we ask what 2022 will hold. It is difficult to predict the future, especially when it comes to stock markets. Stock markets are no exception to this rule.

Your average strategist might not have guessed that Mongolia would be the best performing index in 2021, or that a chain of movie theatres would earn around 1,200% returns.

While most analysts foresaw the recovery after the pandemic-induced slump in stocks, few predicted the magnitude of the rally that drove European and U.S. stock markets to record levels or the recent drop following the emergence of the omicron version of Covid-19. Fewer analysts had predicted the collapse in China and the liquidity crisis that impacted the nation’s developers.

Many of the changes in stock markets this past year have been related to certain conditions. It was worst if you invested in Turkish stocks. Turkey’s idiosyncratic approach towards inflation sent the lira to the bottom. But it was great if your love of South Korean television drove you to invest in Bucket Studio Co. which owns a stake at an agency that represents Lee Jung Jae, the lead actor in Squid Game.

These are exceptional cases, but there were larger themes that dominated the market in 2018. Even if you are wrong in your predictions, these topics should be of interest to you for 2022.

Pandemics have been the main driver of the market for nearly two years. This led to a crash in 2020, followed by a sustained rally due to vaccination programs that allowed economic recovery. Now, worries about the omicron version have caused ripples in world stock indexes.

Many strategists believe the virus will be a minor issue next year as anti-viral drugs from Merck & Co. and Pfizer Inc. increase the arsenal of humanity against this deadly disease. Despite warnings that this new strain might not respond to existing treatments, the majority of experts still believe the same.

The pandemic taught us one thing: Equity strategy is one thing and epidemiology another. Romain Boscher is Fidelity International’s global chief investment officer for equity.

With volatility at its highest level since January, even if the virus disappeared from our lives, it would still likely determine stock market direction as there would be no more grounds for fiscal or monetary stimulus, the main drivers of this year’s exuberance.

The market was concerned about the rise in prices this year. This is because soaring corporate earnings showed that companies can pass higher costs onto consumers who are willing to spend.

As stocks have already priced in, if inflationary pressures decrease in the coming months, don’t expect a relief rally. In a note, Goldman Sachs Group Inc. strategists Vickie Chang and Dominic Wilson wrote that the market might not be able to enjoy its temporary inflation cake in 2021.

Expected peak inflation at the turn of 2021-22, before slowly receding, Source: Organization for Economic Cooperation and Development economic Outlook 110 database, OECD calculations

Things could get complicated if price pressures continue or intensify. Stocks can only be used as a hedge against inflation if they are kept within a certain limit. Oddo BHF and WallachBeth Capital put that at 3% to 5.5%. Lombard Odier, WallachBeth Capital, and WallachBeth Capital agree. Florian Ielpo is the head of macro-multi asset at Lombard Odier. He said that a sustained price rise above 4% would harm stocks and reduce profit.

Inflation would also force central banks to tighten their policy. This could raise borrowing costs for countries with high debts, like Italy, and drain market liquidity. Federal Reserve chief Jerome Powell warned about the possibility that asset purchases could be tapered faster this week.

Graham Secker, Morgan Stanley’s chief economist, says that the European Central Bank’s potential tapering of peripheral European debt will be one of the greatest downside risks in the next year. JPMorgan Chase & Co. strategists cited a hawkish turn on central banks as the main downside to their bullish outlook.

The world’s largest economies, from the U.S. and India, have committed to climate neutrality this year as a way to reduce inflation. Inflation can be slowed by higher carbon prices and environmental taxes, and the under-investment of fossil fuels has led to an increase in energy costs.

Asset managers, from BlackRock Inc. to Nuveen, believe decarbonization offers unprecedented investment opportunities. You need only look at electric cars as an example: Tesla Inc.’s stock has risen over 1,000% since last year’s start, while Rivian Auto Inc.’s market capitalization briefly rose to more than $100 Billion after last month’s trading debut. Even though it is essentially non-existent, its sales are still very low.

It is believed that stocks that are positively exposed to long-term decarbonization benefits will have a longer life span. The Green party is now in power in Europe’s largest economy. This could give decarbonization stocks a boost after the declines in the stock of Vestas Wind System A/S and Siemens Gamesa Renewable Energy SA this year.

Facebook’s rebranding brought attention to an expanding space of economic activity beyond the physical world. This includes social media and gaming platforms. Chipmaker Nvidia Corp. and video-game company Roblox Corp. were just two stocks that surged briefly following Mark Zuckerberg’s rebranding of Meta Platforms Inc.

According to Epic Games Inc. Chief Executive Officer Tim Sweeney, the metaverse, which is a digital world that allows users to socialize, play video games, and conduct business, represents a multi-trillion-dollar opportunity.

A digital Gucci bag model that can only be used on a gaming platform can already cost more than a physical one. According to Morgan Stanley, people spend more time online than they do in physical spaces. The pandemic accelerated this trend, but it will continue to grow in the years ahead. It may even accelerate when Apple Inc. joins.

Beijing took drastic measures to limit the profits of tech giants and tutoring companies this year. It also imposed restrictions on lending to real-estate developers in order to reduce its dependency on the sector. Soaring factory-gate prices made companies’ profit margins difficult to sustain, and the absence of significant easing measures from the central bank in recent months have impacted economic growth.

The worst performing offshore Chinese stocks in Hong Kong this year are the Nasdaq Golden Dragon China Index, which is more than half a per cent below its February peak. The MSCI China Index is at its lowest level since 2006.

The MSCI China Index trades at a near-record low compared to its global peers, nevertheless, global institutions are becoming more positive about Chinese stocks.

BlackRock believes the peak in regulation has passed. It expects that more pro-economy actions will start to have an impact in 2019. BNP Paribas predicts Beijing’s adjustment of its policies towards real estate developers and support for the private sector at this month’s key economic meeting.

Lucy Liu, BlackRock portfolio manager Lucy Liu stated that “we believe the timing is right now”, during a briefing held on Nov. 23.

Goldman Sachs is positive about the investment opportunities that President Xi Jinping’s campaign for “common prosperity”, such as in renewable energy, and is optimistic. UBS Group AG claims that tighter regulations are priced in, and corporate earnings, as well as valuations, will improve.

These themes are not always easy to track and investors won’t get meaningful returns if they don’t. There are potential black-or-white swan events all around: the U.S. midterm election, the French presidential election, tensions in Taiwan, and a full-blown crisis for Turkey’s economy after the plunge in the lira. Traders should be aware of global warming and supply chain bottlenecks.

Therefore, it’s not surprising that there is no consensus among the most prominent strategists in the world about the direction of the equity market. While HSBC Holdings Plc’s Max Kettner recommends investors to stop buying stocks in the first half of next year and sees things improving in the second half, UBS Global Wealth Management forecasts the exact opposite: a positive start, followed by a deteriorating outlook at the end of the year.

Goldman Sachs predicts that markets will continue to rise next year. Bank of America Corp., however, is more pessimistic and expects low, negative, or in any case volatile, returns for 2022.

We learned something from 2021 that investing in the fundamentals of companies is not always the best strategy. Some retail investors lost sight of these fundamentals and made significant money last year. AMC Entertainment Holdings grew by around 1,200% and GameStop Corp. returned more than 800% due to a social media-fueled craze.

Goldman Sachs recommends that investors avoid high-labour costs firms and stock values that are solely based on long-term growth prospects. However, this is what strategists recommended last year.

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