As markets around the globe have reopened and countries have adjusted to the pandemic, economic growth jumpstarted at a rapid rate in 2021 and although lower, next year appears also to be a fruitful one for investors, according to experts.
The FTSE World index has grown 18.8% over the past year and analysts predict this fast rate of growth will continue across next year.
According to Julien Lafargue, chief market strategist, Barclays Private Bank, global recovery is currently at its peak, with G7 economies growing at 5.1%, well above the 1.4% historic average. He anticipated this growth rate will steady out to 4% by 2023, a lower but still higher than average figure.
Economic growth in the US has risen rapidly after a faster reopening than expected and the country is one of the major growth stories heading into 2022.
Luca Paolini, chief strategist at Pictet Asset Management, said: “For the first time in living memory, the US economy will outperform China’s, growing at 5.6% in 2022, and will register a positive output gap, potentially the largest in three decades.”
The US may have had a head start but Lafargue, said that other markets will join the global recovery next year. Below, Trustnet looks at the main global stock market factors that investors will need to watch for in 2022.
Inflation
Despite this positive growth trajectory, many analysts are concerned with how staggeringly high levels of inflation will affect markets in 2022.
Production halted worldwide when Covid initially hit last year and the global supply-chain is still trying to catch up. High demand for commodities such as energy and fuel , which are in limited supply, will continue to drive prices up significantly.
Ben Russon and Will Bradwell from Franklin Templeton said that stagflation, where the rate of inflation far exceeds economic growth, is a potential scenario in 2022 as prices are projected to rise further.
Meanwhile, Guy Foster, chief strategist at Brewin Dolphin said that these supply chains will “gradually unclog” in 2022 after lagging for so long, “but this will likely only happen towards the end of the year”.
Therefore, inflation rates are expected to get worse before they get better. Nigel Green, chief executive at deVere, said: “Inflation is set to be the number one investment headwind facing us in 2022. Now is the time to review portfolios.”
With some of the worst domestic inflation levels, the Bank of England raised rates to 0.25% in December, while the US Federal Reserve (Fed) accelerated its tapering policy further after inflation rates reached 6.8% in November, noting that it will now end its bond buying programme earlier than planned in March 2022.
Despite these efforts to slow the rate of inflation, analysts at Cross Border Capital still predict a 10% decline in purchasing power for the US dollar next year, adding: “We believe the current Fed lacks the necessary fortitude to tackle the inflation problem.”
Tackling climate change
Chris Dodwell, head of policy and advocacy at Impax said that the huge global effort to tackle climate change will “amplify investment opportunities” in environmental, social and governance (ESG) funds next year.
The G7 Summit in Cornwall and COP26 resulted in numerous joint commitments being made to promote sustainability, most notably the pledge to cut methane emissions by 30% by 2030 of which 100 countries were signatories.
The international focus on sustainability is likely to accelerate an already roaring trade in ESG. Analysts agreed that this trend is highly likely to persist throughout next year as government budgets such as the EU’s Covid recovery fund and US president Joe Biden’s ‘Build Back Better’ budget will invest primarily in sustainable companies and infrastructure, giving the sector added impetus.
Technology
Following a period that has highlighted the importance of technology in maintaining production, Bill Street, chief investment officer and Daniele Antonucci, chief economist at Quintet said that a significant wave of inflows to the technology sector can be expected next year. This is something that Japan’s technologically innovative market could benefit from in future.
Additionally, 25% of the world’s clean energy technology originates from Japan and the country’s large automotive sector is also likely to be profitable as the popularity of electric cars grows. Therefore, it may be in a strong position to ride both the ESG and technology waves next year.
China
China, the main driver of global growth for the past decade, has had a weaker year, with growth slipping to 4.9% in the second half of 2021.
Natixis Investment Managers, Jack Janasiewicz & Garret Melson suggested that China’s weaker performance is also likely to slow the growth of others in the emerging and European markets moving forward due to their reliance on the country for trade.
Opinion on China’s future is divided, with some anticipating a strong rebound next year, while others expecting further losses.
John Surplice, head of European equities at Invesco, said they had reduced their exposure to Chinese markets ahead of the new year, a clear sign that fund managers see further volatility ahead.
This year has been a tough one for investors in China. The FTSE China index went down 20.4% over 2021, almost 40 percentage points below the global FTSE World benchmark.
These mass sell-offs are largely blamed on drastic domestic policy changes made by the Chinese government. The country’s goal of ‘common prosperity’ was introduced to reduce the wealth gap, but has damaged its own private sector by limiting large companies’ net income.
Oscar Yang, co-manager of the Asian Environmental strategy at Impax, said: “These crackdowns exemplify the policy risks facing investors in China. Our sense is that these risks have not abated, especially ahead of the 20th Communist Party Congress in 2022, which will decide the leadership and the high-level policy direction for the next decade.”
However, John Malloy, manager of the RWC Global Emerging and Frontier Market Equity funds, said: “We believe that policy measures are near a turning point and the below-trend growth will prompt Beijing to stabilize the market.
“We expect a policy shift toward counter-cyclical easing, featuring a slightly wider fiscal deficit in 2022 with a corporate tax cut, pro-consumption measures, and green infrastructure boost. This will potentially help accelerate GDP, returning to its potential growth rate.”