2021 was a year of booming markets which were in danger of overheating before the Omicron Covid-19 variant came along. A profit boom on both sides of the Atlantic has supported equity markets, with the US looking exceptionally strong in the fourth quarter.
But the virus is deflationary, and the new variant has pushed
2021’s inflation scare into the background. Central banks will
hesitate before raising rates for longer; bond yields will fall
back; and the US 10-year treasury bond will end up ranging
between 130bps-170bps. How the US financial markets
behave is very important for European markets.
We must remember that a coronavirus is a cold virus in
a particularly nasty form. As we get chillier weather in the
northern hemisphere over the next few months it is going to
come back to bite us. Until the whole world is vaccinated, this
will keep on happening. Which means that the equity market
bonanza of the past 18 months will not be repeated in 2022;
it is going to be a volatile year across all financial markets.
We are going to see a stop-start economy in a tough winter, bringing with
it some corporate revenue shocks. If the US proves quite resilient there
will be lots of opportunities. So, stock selection guided by razor-sharp
research is the holy grail.
How the consumer reacts will be key. It is too early to be positive about
travel and leisure companies, but some oversold consumer staples
stocks may be good value, as secure growth is a winner. Similarly, some
consumer discretionary stocks may continue to perform well. Cyclicals
will struggle to outperform in the renewed uncertainty. Banks need clear
skies to thrive – revenue optimism, confident borrowers, hawkish central
bankers and buoyant capital markets – otherwise earnings are at risk.
Europe’s luxury goods stocks are interesting. Those at the peak of the
luxury pyramid, such as Hermes and LVMH, are great at managing their
way through this uncertain world. They are holding back product, creating
greater desirability, and customers are very happy to sign up on waiting
lists. And it’s not simply handbags – even their tableware is in demand.
If there is a big fall in demand they can just fill up their waiting lists.
COP26 was a turning point for companies everywhere. They must now go
from the theory of the 2015 Paris Agreement to the practicality of 2021’s
Glasgow Climate Pact. They must come up with better targets and better
information, or shareholders will hold them to account. As investors, we
will use our votes – voting against managements if we need to force the
path of change. It is a long way to the 2050 net-zero target, but only a
short way to the intermediate stage in 2030. There is a huge amount to
do if average global temperatures are to be held below two degrees.
I have great faith in human nature, but the pace of change must increase.
Scientists showed what they can do when they found a Covid-19 vaccine
in double-quick time. They are too smart not to get this right.
Europe’s political leadership is in flux. Angela Merkel stepping down
as Germany’s chancellor after 16 years can mean more infrastructure
spending, which the country desperately needs. The outcome of France’s
2022 presidential elections, key for the UK as well as Continental Europe,
hangs in the balance.
2022 looks set to be a stop-start year. Detailed research driving a
better understanding of companies and business models will pay off.
Smart companies that have done their homework will have the chance to
make opportunistic acquisitions. And, as ever, there will be opportunities
for clever stock selection.
