John Charalambakis, Mohamed Ramzi Roshdi, & Nicolas Abdelhak

Thucydides taught us that the past shapes the future, but the latter has a tendency to depart from the former with a vengeance! In this commentary, we offer an initial assessment of next year’s outlook which, in a nutshell, carries a lot of the luggage from the previous two years, but which may also be hiding in plain side a pivot in the markets’ direction.

Let’s start then with some facts: For the past 75 years, the second year of a new presidency delivers below-average stock market returns. What are those ingredients that could enhance such tradition? Here is an indicative list:

• Economic and financial support programs (fiscal and monetary) will be of a lesser magnitude than the ones which uplifted the markets since late March 2020.
• Economic growth around the world (including, and perhaps primarily in China) will slow down.
• Inflationary pressures may lead to higher interest rates and could also restrain consumer spending.
• Corporate earnings growth is also expected to slow down significantly.
• Strong market performance – especially after three consecutive years in the midst of abnormal times – is usually followed by market weakness.
• The number of unvaccinated persons could become the trigger of lockdowns (such as in Austria) or restrictions that could significantly reduce economic activity, especially if the new omicron variant strengthens and proves more resilient to vaccines.
• The technology crackdown in China, in combination with a possible hard landing in the Chinese real estate market (which contributes at least 25% to Chinese growth), could have significant negative consequences for developing, as well as developed, markets as a cascade of fears (from commodity prices to Asian bonds, and stock markets around the world) could undermine the slower, but still strong, global growth trajectory.
• Geopolitical uncertainties elevate the risk premium and could reduce investment alpha.   
• It is always possible for the unknown stochastic factor to emerge from the background and trim prospects and expectations, especially if combined with profit-taking and margin calls.
• Dysfunctional politics of putting partisan agendas ahead of national and international priorities could bring things upside down.

What then can we say about those forces that are shaping up to give us, what some analysts call, another roaring ‘20s? Before we outline those positive factors that could offset the bear forces discussed earlier, allow us to share with you the structural pivot that portfolios may need to experience starting in 2022.

Indeed, there are some similarities between the 1920s and the 2020s. Here is, again, an indicative list:

• We are emerging from a pandemic like the global economy did in the early 1920s.
• Technological innovations in AI, robotics, energy, “motorvation”/EVs, cloud computing, chip making, the metaverse (to name just a few), remind us of the 1920s when radio, telephone, cars, bulldozers, home appliances and television sets started advancing the standard of living, improving productivity, and creating a stock market frenzy financed by easy credit policies. Of course, we do not forget that the irrationality of those credit policies led – along with other crucial policy missteps – to the catastrophe of the colossal stock market crash and the subsequent Great Depression.  
• There is an influx of investors nowadays (see cases of Robinhood, FinTwit, etc.) whose fever has led to an unprecedented figure: More than 70% of portfolios are allocated to stocks.
• Unsound money and speculation on cryptos have the aroma of the 1920s.

We are, therefore, of the opinion that portfolios in 2022 need to make a decisive pivot by adopting a 7-10 year time horizon (for a portion of their holdings) which will be dedicated to the following themes (we imply of course that such pivot should be built over a 2-4 year horizon via buying corrections and increasing exposure gradually):

• Robotics, AI, business automation, corporate and consumer software, cyber security providers, EV tech and autonomous mobility.
• Clean energy, energy transition and storage, decarbonization, and carbon trading.
• Genome mapping and gene editing: Human genome mapping along with gene editing holds the future of scientific revolution in treating diseases, improving lifestyle, and, consequently, advancing life and productivity. Genomics and cell-therapy will create a new landscape for the health care sector as well as for insurances.
• Digital wallets: Apps like PayPal and Square are replacing traditional cash as most of our transactions are moving online. While this has enhanced the image of cryptos, the forthcoming central banks digital currencies will revolutionize the world of finance and could (adversely) disrupt the role of cryptocurrencies within the global financial ecosystem.

Assuming then that such pivot is adopted in portfolios starting in 2022 (no matter what), here are the factors that could partially or completely offset the bearish forces and give us an equities market with decent returns in 2022:

• Global economic growth could surpass 4.2%
• US and EU growth rate is expected to be at least 3.1%
• Monetary policy will remain fairly accommodative as central banks will not cease their QE programs, but merely slow them down. In addition, real interest rates will remain in negative territory which in turn boosts returns.
• Fiscal policies (from infrastructure spending to the clean energy transition, to programs like EU’s Next Generation) will boost spending.
• Unemployment will continue declining, supporting higher incomes, sales, and profits.
• Corporate earnings growth could range between 9-12% which is still pretty healthy.
• Tech innovations will advance market momentum.
• Consumer savings and pandemic recovery could become cornerstones of a solid turnaround.
• Inventory built up (part of new investment spending) will boost spending and become a basis of a magnification effect.
• The easing of supply-chain choking points and the slowdown of inflationary pressures will add to market momentum.   

In closing, let’s all remember what Heraclitus taught us: we should expect the unexpected so that we are well-positioned to recognize it when it arrives.