The first week of trading on markets in 2022 has seen renewed volatility, continued divergence in sector performance (commodities up, banks up, tech stocks down), and a spike in treasury yields (higher yields means bond prices are falling). Investing is not easy, especially now, so we want to start the year on a more positive note.
This week we will lay out the optimistic case for investors in 2022, and how likely we think this is to happen. Next week we will review the major risks facing investors.
The most likely bull-case scenario for 2022 runs something like this:
(i) The pandemic is over: The Omicron strain of COVID-19, given its very high rate of transmissibility and far milder symptoms versus previous strains, marks the final act of the global pandemic. Previous viral pandemics (Spanish Influenza) have ended when the virus has become less severe and the disease becomes ‘endemic’, i.e., much more like seasonal flu. Some scientists and public health authorities are already indicating that Omicron’s lower severity indicates we could be at that stage of the pandemic.
(ii) Economic recovery: Confirmation that we are at the end of the pandemic would quickly lift the constraints on the global economy holding it back. Widespread lifting of restrictions on travel and general economic activity would support economic demand, while also alleviating much of the supply chain problems afflicting the global economy.
(iii) China surprise: The Chinese government surprises markets with a major stimulus package to stimulate its economy in 2022. China’s economy slowed significantly in late 2021 due to self-imposed restrictions on its property sector and new regulations on its technology companies. The thing the Chinese government is most afraid of is not America, it is an uprising of its own people. Rising unemployment and a slowing economy can have a nasty habit of translating into popular unrest, and the Chinese government will avoid that at all costs (literally). They also have a lot of capacity to stimulate their economy with $3.4 trillion of currency reserves.
(iv): Inflation subsides: Most of the higher inflation today is due to supply side constraints. The end of the pandemic and lifting of restrictions would bring many people back into the workforce and alleviate the supply-side inflation currently afflicting the global economy. Higher growth and lower inflation… that sounds good!
The probability of the above scenario playing out is quite high. We agree there’s very promising evidence that Omicron could be the tail-end of the pandemic. That would be very supportive of a global economic recovery and could alleviate much of the inflation problem too. We also think the market is underestimating the potential for a major Chinese economic stimulus program.
To continue the title of this article, unashamedly quoted from Rudyard Kipling, ‘If you can keep your head when all about you are losing theirs… Yours is the Earth and everything that’s in it’.
The first six months of 2022 will be characterised by continued uncertainty and market volatility, likely interspersed with some fear mongering from the media (and sadly, from political leaders too). But there is a good chance our optimistic scenario will be playing out under the surface.
Keep your head, look through the fear and panic, continue to invest in high quality attractively valued businesses, and 2022 might just be a very successful year for the patient investor.
Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.
