Macro trends for investing in 2022: why it’s time to think like a fox
About the Author: Christophe Intelligent is chief global strategist and director of the Barings Investment Institute, and a former senior economic policy official at the US Treasury and the White House.
I hate january.
It’s not the shorter days or freezing rain or post vacation blues. But if you are in finance “strategy”Game as I am, the expectations are huge. This is when you’re supposed to make a living, either making ridiculously accurate predictions on the Russell 3000 Value Index or wisely thinking about the prospects for humanity as the world order lifts off. .
The former is far too specific for anyone to take the hypothesis seriously; the second is much too broad for an answer to be meaningful. And as the recovery continues, this year’s macroeconomic changes will be significantly less dramatic than the shocks and policy responses of Covid over the past two. This means that returns on investment will depend more on choosing the right parts of the capital structure of the right companies than trying to predict the number of rate hikes or the price of oil.
Even for someone doing macro for a living, this is shaping up to be a micro choice year.
New variants of Covid will likely emerge throughout 2022, but we’ll handle them better. The Fed will tighten a few times, but will always favor an accommodative policy as inflationary pressures ease. The richest governments in the world will run lower deficits, but still spend generously. China will slow down, but authorities will ensure economic health as the National Congress of the Communist Party of China meets. Most emerging markets, at least where their leaders do not defy the laws of economics, should finally benefit from vaccines and the recovery in world trade.
Will US equities return another 27%? Unlikely. Will copper still increase by 25% (above 26% from the previous year)? Highly unlikely. Will Baltic Dry commodity freight rate index rise 62% amid supply chain issues? Almost certainly not.
Real market action this year will not come from big moves in the dollar, Treasuries or oil. The best investments will be in companies that appear resilient in the face of much broader trends that will shape profits over the next decade.
Even after the increase in support for a pandemic, public spending and debt are expected to rise amid pressures to correct inequalities and pay the costs of the climate transition. Savvy businesses will be looking for ways to take advantage of this increased tax generosity, whether it be tuition subsidies, bridging contracts, or charging stations for electric vehicles. Really smart management will be careful not to overload balance sheets in the event that rising public debt starts to push up everyone’s borrowing costs.
Climate change itself is altering the relative prices of everything from food and land to energy and insurance. Of the $ 2 trillion in natural disaster costs in the United States since 1980, a third have come in the last five years. The best investment targets will be companies with their own climate strategies. It’s more than just a commitment to a “net zero” emissions target; it means understanding how profit margins can rise or fall compared to what promises to be a complete reshuffle in economic activity over the next few years.
Then there is the technology. It’s hard to name an industry where the combined power of cheap data storage, mobile data networks, and artificial intelligence won’t deliver huge profits for companies who know how to best use them. The industrial internet is already generating productivity gains in the manufacturing sector, while the disruption of decentralized registries is only just beginning to manifest itself in global finance. Choosing the winners will be difficult, but the obvious losers are those who do not yet think carefully about these changes.
People change too. We are at the first moment in human history when the population over 64 is more numerous than children under 5. This has implications for the balance of savings and investment, the productivity of workers and the composition of final demand. The pandemic has already brought about significant changes in work and travel habits, and the aging of the population will bring even more of them.
Finally, as always, global politics will matter, and the growing tensions between the world’s two largest economies directly affect many outcomes. Washington and Beijing will roll out even more tariffs, regulations, sanctions and export controls on their respective companies. There will be new opportunities as each country turns in on itself, but any business with a supplier or customer in both jurisdictions will need to have a back-up plan.
The world is divided into “hedgehogs” and “foxes”, in the words of the great British philosopher Isaiah Berlin. Hedgehogs “know one thing” and see the world through a single defining idea, while foxes “know a lot”, applying a range of experiences differently depending on the circumstances. Much to the chagrin of those of us who like to think in terms of unifying financial principles and elegant macroeconomic frameworks, the coming year is shaping up to be a good time to be a fox.
Investment strategies for 2022 will require a lot of sharpening and kicking to examine individual business models to determine their ability to grow and prosper amid these larger transformations.
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