COVID, Inflation and Politicians – Looking to 2022

Paul Cartmill
Major Themes of 2022 – Paul Cartmill (Director)

There is no denying that both US and domestic equites posted another strong year for investors. There are reasons for both optimism and pessimism on stocks as we move into 2022. We’ll go through the major factors at play and at the same time, make some predictions for the year ahead —

  1. Covid Mutations – Covid is here to stay and we are all going to get it. With vaccines and antiviral drugs in production, it is likely that we hear less and less about Covid in 2022 and even more likely that the market cares less and less about Covid! I’ll make a prediction that Covid becomes a nonissue for developed nations, but remains an issue for emerging markets. This is due (obviously) to higher vaccination rates across the OECD relative to developing nations.

    Manufacturing across the Asian region will continue to be bumpy for some time, but the focus will shift back throughout 2022 from virus concerns to the need to sustain jobs and increase economic growth, especially in China.

  2. Inflation – Price pressures will stay elevated but should ease as the Fed tapers and looks to raise rates and supply chains begin to normalise (with volatility). The curve is flat but could see some steepening at the long end as the Fed ends the bond purchase program in 1Q22. I predict that the market won’t be too spooked by Fed moves given that real rates would remain firmly negative even with rate rises at the short end. I also don’t believe the Fed will be overly concerned about its $8tr balance sheet by selling assets it has just finished purchasing. Rather than focusing on the often quoted CPI, watch the core PCE deflator given its the preferred indicator of inflation used by the Fed.

  3. Geopolitical Risks – The market always underestimates geopolitical risks although it is my biggest concern for 2022. With Russia threatening Ukraine and China openly talking about Taiwan invasion, the risk of either one (or both) of these conflicts occurring would be a major catastrophic event for 2022. There is no way of hedging geopolitical risk although US markets would arguably fair better than Asian or EU equities. Remaining diversified and investing in liquid markets where positions can be quickly and easily unwound remains the best strategy for handling such risk.

I am generally optimistic about global markets in 2022. I think there will be some volatility as the market adjusts to Fed movements, but given low rates and negative real rates there remains little alternative to holding exposure to equities across your portfolio. Asian equities presents more risk in my view, as China’s ‘common prosperity’ push has wiped ~USD1tr off its markets through the price declines in Chinese tech stocks. China’s real estate sector is struggling under massive debt and China’s growth has been hit hard. Although the CCP has shown that it is much more concerned with cementing its political power as opposed to stock market valuations, in general nothing ferments public discourse more than when the population gets poorer. Therefore, it is possible we see expansionary fiscal/monetary policies in China in 2022 which could make some of the Chinese tech stocks seem oversold. Watch this space….

Steven Everett
The Portfolio View – Steven Everett (Director)

Australian investment banks were unusually active across the quarter with a myriad of mergers and acquisitions being bandied around the Australian market. In just the stocks we own across our portfolios, corporate activity occurred in Sydney Airport, Humm Group, Virtus Health and Link Administration.

Broadly across the remaining stocks we own, divergence in returns was notably higher. Commodity names, specifically lithium and uranium continued to perform strongly while retail, travel and banking gave back all their gains from the previous quarter. The Omicron variant of COVID19 is almost certainly to blame for the market’s retreat from these names with fear of a repeat of early 2021.

With the expectation that 2022 may have installed higher volatility, without the better than normal returns seen in 2021, we added to the portfolios some international exchange traded funds to provide further geographical and company diversification to the strategy. The decision to turn more focus on investment in the United States has proven so far to be the right one with the AUD devaluing against the USD circa 3%, with the expectation that the AUD may continue to weaken against the US dollar if the FED makes good on their promise to lift rates. This is contingent on there being no lift in the demand for commodities in China without expansionary policies to spur growth this year.

I am particularly excited about the addition of Queensland Pacific Metals (QPM) to the portfolios during the quarter after almost twelve-months of engagement with the company. Headquartered in Brisbane, QPM is in the late stages of developing a negative carbon emitting battery chemicals processing plant in Townsville, North Queensland. The many merits of the project have been highlighted on the global stage with a significant investment from LG and Posco, as well as being visited in December by South Korean President Moon Jaein as part of his visit to Australia, further cementing the strategic partnerships between the two nations.

As we move into 2022, our focus will be on transitioning out of some of the smaller, more speculative investments in the portfolio to quality names which are expected to perform better in times of greater volatility. Long-duration assets (or those with a longer period between investment and return) are mathematically kneecapped when the cost of funds increase. A perfect illustration of this effect can be seen in the likes of the BNPL space which has effectively halved since the US Federal Reserve began talking about a persistent inflation print, and a subsequent need to consider reducing its balance sheet. Although no company is immune to repricing of the risk free rate, those with pricing power and current, sustainable earnings are more resilient during the transition. It is these types of companies that I would define as ‘quality names’.

That being said, if the Fed’s final decision is to move at a slower pace than the market is pricing, we could see a rather vigorous bounce in the heavily sold off tech names, but I think we’ll see some sign posting by the market if the consensus changes, giving an opportunity to buy in.

Thesan Asset Management provides discretionary account services to wholesale and sophisticated investors. Further information on Thesan’s service offering can be found on our website.

This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person’s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a disclosure document relating to the product and consider the content before making any decision about whether to acquire the product.

Thesan Asset Management Pty Ltd ACN 634 179 945 is a provider of financial services to wholesale clients only. To be considered as a wholesale client you must meet specific criteria and be able to understand the investment, its risk and benefits and be able to make your own informed investment decisions. This information/service is not suitable for retail clients.

Subscribe for updates

Download our Bond Investing Guide

Plus Subscribe to our News & Insights