GRIMALDI & PARTNERS: Stock markets outlook for 2022
von Silvano Grimaldi, Grimaldi & Partners
Risks to economic development
It is becoming increasingly clear that the economic recovery in the economic areas that are most important for global economic development has lost momentum. In addition, sooner or later the abrupt rise in the inflation ratesmeasured in terms of consumer prices will certainly force the central banks to react to monetary policy, the effects of which on macroeconomic developments cannot yet be reliably assessed.
The rise in inflation rates and real economic developments in 2021 were primarily determined by base effects, which are now likely to gradually expire. The global economy will nonetheless grow at a rate of almost 5 percent in 2022. As before, the economic recovery processes in the individual countries will proceed very differently. Not only the growth contributions of many emerging countries, but also those of the economic areas that are decisive for global GDP growth - the USA, the euro zone, China and India - will be lower. In 2022, for example, a GDP growth rate of around 5 percent is expected for the USA (after almost 6 percent in 2021), for the Euro zone an increase of around 4 percent (2021 just under 4 percent), for China a growth rate of around 5.5 percent (almost 7.5 percent in 2021) and a growth rate of a good 7 percent for India (around 8 percent in 2021).
Inflation rates are likely to decline again in the course of 2022 due to the expiring base and special effects. In the current year, it can be assumed with some certainty that prices for fossil fuels will barely rise or possibly even fall, that production will be adapted to developments in demand and that the situation in the supply chains will gradually improve. However, inflation rates will only fall gradually and in the Euro zone, for example, will still be well over 2 percent in the first half of the year. Only towards the end of 2022 is the rate of inflation likely to approach the 2 percent target set by the ECB. In the USA, the US Federal Reserve's target of 2 percent will not be achieved in 2022 either. New massive fiscal stimuli and the expansion of the broad monetary aggregates will lead to an average rate of inflation of between 3.5 and 4 percent.
The progress of the pandemic due to new virus mutations, politically motivated trade barriers that cannot be completely ruled out, or other impairments to supply chains could make themselves felt in the past year, but not fundamentally change the overall picture of a global economy that will continue to recover in 2022.
Effects on the stock markets
The stock markets are currently confronted with a number of negative influencing factors. Increasing corona infections and new virus mutations can be observed in many countries. Second and third-round effects of high global inflation rises, supply chain problems that have not yet been completely resolved, etc. will continue to weigh on the corporate sector for some time to come.
The price dynamics for many intermediate products and raw materials are still a risk for companies' margins. However, many companies should be able to maintain or even increase margins through more efficient production processes and / or by at least partially passing on the increased costs. The still relatively good global economic situation remains a positive environment for equities. In practice, investors hardly have any alternatives. The markets have rightly practically not reacted to the key rate hikes that have taken place or been announced. Although key interest rates influence capital market rates, they do not determine them. Long-term inflation expectations and the relationship between supply and demand for capital are the decisive factors for capital market rates.
Stocks investors, however, have to be prepared for higher price fluctuations, as the price levels reached should also be used to take profits. The current valuations of stocks are not generally unreasonable, as government bonds and most corporate bonds - especially for private investors due to the predominantly negative real interest rates - will remain unattractive for the foreseeable future. Rising asset prices and thus rising share prices, on the other hand, protect investors from the consequences of possible sustained increases in inflation. The high attractiveness of stockscompared to interest-bearing investment instruments is still not likely to be fully reflected in the prices.
In one scenario - with only a slight tightening of interest rate policy in the US - there is much to be said for a stronger weighting of cyclical value stocks - especially for stocks of companies with a certain pricing power, i.e. companies that can pass higher costs on to their customers Loads of stocks from the growth sector. The main thing to be checked is investments in technology companies that have not really made lasting profits to date and therefore show extremely high price-earnings ratios unjustifiably. For defensive equity investors, dividend stocks - stocks from companies with high dividend yields, stable business and growth opportunities, a relatively low valuation and which largely dominate their field of business - should continue to be preferred.
© 2022, Grimaldi & Partners AG
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