We start 2022. We left behind two years of notable uncertainty and lockdowns that led to the biggest drop in world GDP history.
If 2022 was a year of rebound and recovery, it is likely that this year will be the year of the moderation both for economic growth and inflation and returns on the stock markets are not as large as those seen the previous year.
In this context, we are presented three big macro uncertainties that condition risk in the markets: how long we will get inflation stressed, potential additional COVID-19 lockdowns as infection rates rise again or new variants emerge, and the duration of the housing market-driven slowdown in China.
We will continue with inflationary pressures but weakened
The main surprise of 2022 has been the increase in inflation and will join us in part in 2022. We’ve seen uneven reopenings from lockdowns that have impacted supply chains and businesses stockpiled supplies… we’ve gone from just-in-time receipt to adding inventory just in case.
The increase in energy prices and the impact of the shortage of semiconductor chips has taken a transcendent role in the rising inflation.
The biggest issue that will worry investors during 2022 is inflation. This economic metric is on everyone’s mind and there is a lot of uncertainty about the reactions of central banks, which will end up conditioning the variable income of developed countries.
In this case, if we look at the historical record, stocks tend to do poorly when inflation spikes, but some sectors have historically performed better in such contexts (Hartford Funds study covering 1973 to 2022).
The energy sector beats inflation 71% of the time and returned a real annual return of 9% per year on average. The sector’s revenues are tied to energy prices, a key part of the inflation picture.
Investment in REITs (REITs in the United States) tend to exceed inflation 67% of the time and record an average real return of 4.7%. This type of real estate companies can pass on price increases in rental and property prices. Consumer staples, utilities, and health care outperform to a lesser degree.
In 2022, Commodities have been the best performing asset class this year amid strong bottlenecks in supply and demand. Gains have been led by industrial metals and energy. Commodities should remain supported by above trend global demand, but the slowdown in China limits upside potential.
in finance, high inflation can hurt banks because it erodes the present value of current loans that will be repaid in the future.
The covid and its variants will condition the markets less
The coronavirus and the different waves with all its variants, is becoming a source of less volatility in the markets. Nevertheless, COVID-19 refuses to disappear as a risk.
New variants resistant to current vaccines are the main threat. For now, despite the increase in cases by Omicron, vaccination is working and mortality has been declining. This is the most important data to analyze the evolution of the pandemic.
We do not yet know the implications of the Omicron variant, but it is logical to highlight the uncertainty that exists around the multiple scenarios of COVID-19.
Linked to the above, there is another risk to assess: a Increased demand much stronger than expected if fears of COVID-19 prove unfounded.
Households have hoarded a lot of savings, and there is a repressed demandthe surveys point to strong business investment intentions and the real rates of indebtedness are negative… An explosive combination to boost demand if the uncertainties surrounding the coronavirus remain absolutely dissipating.
It is a probability, but it would be double edged if it happened. There could be a rally in stocks, but there would also be significant tightening by central banks that would threaten an earlier end to the business cycle.
China and a real estate market that is beginning to show signs of exhaustion
Risks surrounding the real estate market and the drag on the construction economy have increased. A boom in home ownership over the past two decades has channeled a huge chunk of China’s household wealth (70%) in real estate.
Since housing is a key engine of economic growth, contributing about 26% to China’s GDPany major housing crisis could threaten the entire Chinese economy.
Yes ok new home sales fell 32% last month With the Evergrande scandal unnerving investors, huge differences in the way the Chinese property market operates could limit the impact of any bubble burst.
The Chinese government has recently announced initiatives they have reduced the probability of a worst-case scenario by further reducing the risks around property and encouraging demand for mortgages. This is a key watchpoint for the coming months.
The Chinese government seeks real estate market intervention through further fiscal stimulus through 2022 focused on boosting household consumption. However, it is unlikely to be large enough to offset declines in housing markets.
US, European and Spanish equities, what can we expect?
The stock markets of developed countries moved last year between returns of 15% and 30%. most likely, this year we will not repeat these revaluations.
Non-US developed market stocks could eventually outperform US stocks, given its more cyclical nature and its relative valuation advantage over US equities.
The rationale behind this expectation is that above-trend long-term growth and higher long-term interest rates favor stocks with a cyclical and value component over technology and growth stocks.
Given that the rest of the world is overweight in cyclical stocks relative to the US – heavier weight in technology stocks – US stocks should underperform the rest of the world.
And the Ibex? The Spanish selective is heavily overweight financials and cyclically sensitive sectors such as industrials, materials and energyand its relatively small exposure to technology, should benefit this stock as fears related to COVID-19 subside, economic activity picks up and yield curves steepen.