Looking Into 2022

Not many of us will want to dwell too long on 2021. Unfortunately, a year dominated again by Covid-19 with restrictions on social and work life, travel difficulties, cancelled arrangements and far too much time spent in front of screens. But during the first half of 2021 there was a strong global economic rebound, driven by vaccination programmes being rolled out across the world, markets generally shrugged off news of fresh Covid-19 waves and variants.

This powered a rally in value stocks, that tend to have greater economic sensitivity. The second half of 2021 was somewhat different, where optimism gave way to fear and the value rally stalled as inflation figures rose across emerging and developed markets, being mostly due to supply chain disruptions. With China the second largest economy in the world also starting to slow down.

As we enter 2022, higher inflation is proving to be persistent. While some aspects of inflation may be transitory, with supply chain issues improving, it is becoming clear that the cost of living has increased for consumers, due mostly to an increase in energy costs, along with wage pressure creeping in.

Should inflation prove to be more entrenched and not as transitory as perceived, Bonds (fixed income) will not be favourable. Best to shift investments into real assets, such as property, infrastructure, and consumer staples and focus on companies that are best placed to deal with inflationary pressures, whether because they have pricing power, the ability to adapt their supply chains, or can quickly pass on costs.

Value stocks could perform well in 2022 if investors become more confident in economic growth and interest rates rise gently. With recent macro events suggesting that the rotation from high-value stocks into Value stocks could continue, as plenty of value shares have recently burst into life. There are various sectors to look at, many have low-looking valuations. The UK market is a bountiful hunting ground for valuation. Markets around the world are reeling from coronavirus pandemic. With so many great companies trading at what looks to be discount bin prices. Now could be the time for savvy investors to pick up some potential bargains.

Turning to Income, I have previously written about Investment trusts and the Investment trust industry has done well to minimise the dividend challenges during the pandemic era, with dividend reserves being used as necessary to provide a good level of protection for shareholders, some trusts will dip into them again in the coming year, expecting dividends to be covered again from 2023. These days, a lot of income is generated by alternative asset trusts, where there was a lot of fund-raising last year, particularly for those involved in renewables and sustainability. That seems set to continue.

Looking further into 2022, high inflation, as well as the prospect of interest rate rises and the withdrawal of QE, are likely to feature on most investors agendas.

Stephen Lovelock