Just a few days/weeks back, we all were looking forward to the New Year with a lot more energy and optimism as the situation was becoming stable; the spread of Coronavirus was brought under control through a nationwide vaccination programme. But who would have thought, an altogether new guest was knocking at the door, wanting to celebrate the welcoming of 2022 together!!! (You got it right, it’s OMICRON)
Not the ideal start to the New Year as one would have liked, with some cities putting a complete ban on New Year celebrations while others restricting people’s gathering. But amidst all this, we are hopeful that 2022 will be far better than 2020 and 2021 as we are in a much better situation in dealing with these mutations of the virus!
We are witnessing a dynamic change in the macro-environment around the world as we head into 2022 along with Omicron!
Rising crude prices, soaring inflation has been the talk of the town in the last few months. Supply-side disruption coupled with pent up demand has resulted in prices of various commodities skyrocketing leading to new records in some countries like the US with regards to Inflation!
Could inflation play a spoil-sport for the markets in 2022? Well, we believe that given an almost one-sided rally in the last two years, markets need a breather! Inflation is one development that could make the markets pause for some time.
Let’s talk more about what can we expect from equities as well as other asset classes in 2022:
Equity – Right after the pandemic hit us for the 1st time, we have seen a stupendous rally in the Global Markets as well as our Indian Stock Market. Thanks to the unabating liquidity being poured into the financial system by the Central Banks around the world, coupled with ultra-low interest rates. The sheer number of “Multibaggers” that have emerged in the last two years is a reflection of how strong a rally it has been.
A moot question is whether this kind of rally will continue going ahead?
We believe that those days of multi-bagger return with any stock will be a distant dream as we step into 2022. As said above, Inflation could play a spoil-sport and we may not see such high returns. With Inflation coming into the limelight, Central Banks around the world have been forced to ponder over the clawback of easy money that they have pumped into the financial system. Also, rising inflation means interest rates can’t stay at the level they are at right now. They will have to rise to curb easy money albeit gradually, going ahead.
Rightly so, the Federal Reserve has indicated that it would hike rates three times next year to cope with surging inflation. As of now, the Reserve Bank of India has kept its stance accommodative with full support for growth. But, with inflation rising continuously MoM, they may be tempted to ponder over their stance!
Gold – This could be the year for the yellow metal! Gold has traditionally been a good hedge against inflation and this year it could prove its mettle by preserving your purchasing power. Additionally, Gold has been rangebound this year, ending with negative returns (~5%). So, given the current development, we can see some positive upside from Gold this year.
Crude Oil – After witnessing a nightmare H1CY20, Crude oil has been on a strong uptrend. This year saw Brent Crude going past $80/barrel – last seen in August 2018, to touch a high of $86.7/barrel. Gradual reopening of the economy after stringent lockdowns bolstered the demand for oil. Going into 2022, there could be some short-term hiccup due to Omicron. But as things normalize and travel comes back in full force, we could see oil trending upwards. The Organization of the Petroleum Exporting Countries (OPEC) has raised its world oil demand forecast for the first quarter of 2022 and expects oil demand to average 99.13 million barrels per day (BPD) in the first quarter of 2022.
Bonds – Interest rates are expected to go up to combat inflation. Against this backdrop, floating-rate bonds and TIPS could work well in 2022. However, long-duration bonds are expected to underperform in a rising interest rate environment. With economic growth coming back on track, investors credit spreads are expected to narrow down which could lead to money flowing into some High Yield Corporate Bonds as against Investment Grade bonds.
Cryptocurrency – The newest asset class has finally found a place in our annual prediction, as the total market cap of all digital currencies reached $2.34 trillion (equivalent to the GDP of the entire African continent). However, this is a very difficult asset class to forecast. Bitcoin touched an all-time high of $67,582 and slumped to a low of $28,804 in 2021. Energy efficiency, adoption and regulation drive the price of cryptos. We are no experts in crypto, but we continue to expect volatility, as crypto traders are offered as much as 100 times leverage for trading. Crypto lovers have predicted bitcoin to touch $200,000 in 2022, while critics expect the price to fall as much as $4,000. You can decide on whose team you are!
Final Verdict: “Asset allocation will be key for successful investment in 2022“