Investment opportunities & economic trends for 2022

2022 is set to be a year of rebuilding as economies work to move on from the pandemic. Monetary policy, inflation and the rise of sustainable investing will all play their part, creating a mix of challenges and investment opportunities for 2022. 

2022 looks set to be a year of reckoning for the global economy, but still with investment opportunities. 2020 was about surviving the pandemic, 2021 was recovery at all costs, but in 2022 policymakers need to rebuild and prepare for a post-pandemic future, even as Covid-19 remains unbeaten. This may prove to be a far more precarious task than any they have faced to date. The IMF world economic outlook for 2022 predicts that growth across the global, advanced and developing economies will all be lower than 2021. 

The first dilemma facing policymakers in the year ahead is when to turn off the taps and start to tighten monetary policy. The Federal Reserve started to pare back its bond buying programme in late 2021, with countries including Canada, Norway, Australia and New Zealand also reversing direction on monetary policy. 

The direction of travel will, by and large, be determined by the trajectory of inflation and whether it proves transitory or ‘sticky’. While central bankers initially insisted that it would be transitory, higher energy prices, supply chain problems and labour shortages have proved surprisingly persistent. This has forced them into faster action than they had originally planned. 

There are concerns that central banks could make a mistake. Act too soon and higher rates could choke off the recovery; act too late and inflation could take hold. The spectre of stagflation continues to haunt many central bankers, who are keen to avoid a toxic spiral of weak growth and higher inflation.

Voters are looking to governments to resolve major problems such as climate change, infrastructure development, inequality and social injustice. This suggests an era when governments spend more and will run higher debt, even at the risk of higher inflation.

This could ‘crowd out’ the private sector, raising wages and input costs, or it could make the private sector more competitive and nimble in contrast to a bloated state. As yet, it is not clear which will happen.

Fiscal stimulus packages across the world should continue to stimulate the global economy, including the giant $1trn US infrastructure package passed by Congress in November. The EU is currently in the process of raising funds in capital markets for its vast spending package. These may continue to support growth as furlough schemes and business support packages cease.

Higher spending is also likely to mean higher taxes. The G20 nations have agreed to a minimum corporation tax of 15%, designed to prevent companies ‘shopping’ for the cheapest jurisdiction. Countries have already started to impose higher taxes on their citizens, going against the orthodoxy of recent years. In the UK, this has been seen with a rise in National Insurance, plus a rise in dividend taxation.

It’s clear that the world emerging from the pandemic is not the same one that went in. Agile working promises to change office life; e-commerce is already creating profound changes to the high street, while digitisation has become a necessity for much of the corporate sector. Trends, as well as potential investment and trading opportunities, should become clearer through the course of 2022.

Climate change, biodiversity loss and pollution are now top of the agenda for policymakers. They sit alongside an increasing focus on social issues such as inequality, labour rights and wellbeing. Just as they are a priority for regulators, they need to be a priority for investors. Companies that neglect these risks in their day-to-day operations are likely to face existential challenges to their business in the coming years.

More than two-thirds of the world’s GDP is now under a net zero commitment, including the UK, the EU, Japan, and China.

Financial regulators are making climate risk disclosure mandatory through initiatives such as Sustainable Finance Disclosure Regulation and the Taskforce for Climate-related Disclosures. Central banks are stress testing for climate risk. As COP26 showed, policymakers are willing to collaborate to achieve common climate goals. Many are increasingly aware of both their legacy and responsibility.

There are a lot of uncertainties, not least the emergence of the Omicron covid variant, but with each wave of the pandemic the economic impact lessens as citizens and policymakers adapt. Assuming the economic recovery remains broadly in place, there may be a pick-up in some of the sectors that have lagged. That might include Japan, and, possibly, the wider Asian markets. Emerging markets now look notably cheap relative to developed markets and may see recovery start to come through as their vaccine programmes build momentum.

In terms of sectors, healthcare looks cheap relative to its prospects, making it a potential growth stock for 2022. The technology giants now face considerable headwinds – regulation, consumer ambivalence and high expectations. Technology leadership may pass to more niche areas such as cloud computing or security. Equally, 2022 is when much of the fiscal stimulus will finally be spent. This should support energy transition companies.

This has been an extraordinary period for the world. There are considerable uncertainties for investors, valuations are high and there is potentially more volatility ahead, but this should create a wealth of investment opportunities for 2022.