These are the perspectives and risks of the markets for 2022

We started 2022. We left behind two years of notable uncertainty and deadlocks that led to the biggest drop in world GDP in history.

If 2021 was a year of rebound and recovery, it is likely that this year will be 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 major macro uncertainties that determine the risk in the markets: how much we will have the stressed inflation, the possible additional blocks of COVID-19 as infection rates rise again or new variants emerge and the duration of the slowdown driven by the real estate market in China.

We will continue with inflationary tensions but weakened

The main surprise of 2021 has been the increase in inflation and will accompany us in part in 2022. We have seen uneven reopening of closures that have impacted supply chains and companies accumulated supplies … we have gone from in-time voucher to adding inventories just in case.

The rise in energy prices and the impact of the shortage of semiconductor chips has played an important role in the rising inflation.

The biggest issue that will concern investors in 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 equities of developed countries.

In this case, if we look at the historical background, stocks tend to underperform when inflation spikes, but some sectors have historically performed better in such contexts (Hartford Funds study covering 1973-2020).

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The energy sector beats inflation 71% of the time and yielded a real annual return of 9% per year on average. Sector revenues are tied to energy prices, a key part of the inflation outlook.

Investment in SOCIMIS (REIT in the United States) tends to exceed inflation 67% of the time and they register an average real yield of 4.7%. These types of real estate companies can pass on price increases in rental and property prices. Consumer staples, utilities and health care outperform to a lesser extent.

In 2021, Commodities have been the best performing asset class this year amid strong supply and demand bottlenecks. Gains have been led by industrial metals and energy. Commodities should keep global demand support above trend, 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, each time is 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 due to Omicrón, the vaccination is working and mortality has been declining. That is the most important data to analyze the evolution of the pandemic.

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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 COVID-19 fears prove unfounded.

Households have hoarded a lot of savings, and there is a pent-up demandSurveys point to strong business investment intentions and real debt rates are negative … An explosive combination to boost demand if the uncertainties surrounding the coronavirus remain completely dissipative.

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 a 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

The risks around 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, it contributes about 26% of China’s GDPAny major housing crisis could threaten the entire Chinese economy.

Figure 1 Real Estate Market Is A Key Component Of China S Economic Growth

Yes OK New home sales fell 32% last month Because the Evergrande scandal made investors nervous, huge differences in the way the Chinese housing market operates could limit the impact of any bubble burst.

The collapse of Evergrande in China in the face of the 2008 crash after Lehman fell: similarities and differences in the panic in the stock market

The Chinese government recently announced initiatives They have reduced the likelihood of a worst-case scenario by further reducing risks around property and encouraging demand for mortgages. This is a key observation point for the coming months.

The Chinese government seeks the intervention of the real estate market through a greater fiscal stimulus until 2022 focused on boosting household consumption. However, it is unlikely to be large enough to offset the declines in the 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-U.S. Developed market equities could eventually outperform U.S. equities, given its more cyclical nature and its relative valuation advantage over US stocks.

The rationale behind this expectation is that growth above the long-term trend and higher long-term interest rates favor stocks with a cyclical and value component over technology and growth stocks.

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Given that the rest of the world is overweight in cyclical stocks relative to the United States – higher weight in technology stocks – US stocks should outperform the rest of the world.

And the Ibex? The Spanish pick is highly overweight in financial and cyclically sensitive sectors such as industry, materials and energy, and its relatively small exposure to technology, should benefit this exchange as fears related to COVID-19 diminish, economic activity recovers and yield curves become steeper.


Source: El Blog Salmón by www.elblogsalmon.com.

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