7 investment themes you must watch in 2022: Experts tell all

Posted: 6 January 2022 12:40 pm
Over the shoulder view of young Asian woman checking financial trading data with mobile app on smartphone while sitting outdoors in a cafe, drinking coffee. Business on the go

What do investors need to watch out for in the coming year?

With the world still battling the COVID-19 pandemic and the "new norm", investors are likely to once again be in for a volatile year.

But that doesn't mean investors can't take advantage of opportunities that emerge.

Here's what investors need to know if you're to get ahead in 2022.

1. Rising interest rates and inflation

Central banks around the world are seeing rising inflation rates above their target range, largely due to global supply chain squeezes and issues with energy costs.

The Bank of England has already reacted to hiking interest rates, with the US expected to follow soon.

Some market analysts even believe the US will lift rates 3 times in 2022.

While the Reserve Bank of Australia is sticking to its lower for longer strategy, the bond market is disagreeing, predicting a rate rise by November.

This will have a negative impact on higher valuation/growth stocks.

According to Morningstar's head of equities research Peter Warnes, low interest rates have been bullish for stock but are set to change.

"The tailwinds behind risk assets in 2021 will abate in 2022 and likely turn into headwinds as the year progresses. Taking away the punchbowl (stimulus) will challenge valuations with a combination of less liquidity and rising interest rates," he said.

2. The great unknown

While investors would be hoping for smoother sailing following the last 2 years, the market is set to remain volatile due to investors not knowing what will happen next.

Investors will remain wary of how governments will respond to the new COVID variant.

At the same time, how will consumers respond?

And what about interest rates and inflation?

As previously stated they could be a handbrake for growth investors, but it is not a lock as to how central banks will respond.

IG's analyst Kyle Rodda told Finder that it is a great unknown and this is likely to be a theme moving forward.

"I think from what we know right now is that taking any bets on the virus and public policy in response to it are pretty uncertain and fairly fluid," Rodda explains.

"I think the virus is going to continue to be a part of our lives, and will continue to be a factor in driving economic activity, and therefore travel stocks and the like are likely to remain risky bets in the short-term as the slings and arrows of the pandemic unfold."

3. From pandemic to endemic

On the other side of the equation, while remaining unknown, this latest variant could in fact be a positive, relatively speaking.

According to Dr Oliver, while uncertainty remains, the potential that Omicron is a less deadly variant could help the world reach a point of living with COVID.

"While coronavirus remains a threat it appears to be having a far less negative impact on economies as vaccines and treatments get the upper hand," he said.

Although he did point out that uncertainty remains and vaccines could need tweaking.

4. Great value rotation continues but investors can still get ahead

Previously dubbed "the great value rotation" investors have sold down their growth and technology stocks for more consumer cyclicals which are likely to be the bigger winners coming out of lockdowns.

And while growth investing, mainly in technology stocks, have greatly outperformed over the last decade, value investing seems to be making a comeback.

This theme is set to continue in 2022.

But that doesn't mean investors will miss out on strong returns.

"Global shares are expected to return around 8% but expect to see the long-awaited rotation away from growth and tech-heavy US shares to more cyclical markets in Europe, Japan and emerging countries," AMP's chief economist Dr Shane Oliver said.

5. Returns will falter

From a historical point of view if you started investing during the recovery in 2020 you've done extremely well.

In fact, the ASX averages around 9% per year.

The 2021 financial year saw investors return a top 24% which was the best year since 1987.

But such strong growth is unlikely to continue.

"History suggests that the returns that we've seen over the last couple of years are fairly extraordinary and will be difficult to replicate," Rodda said.

"However, there is still the sense in the markets that there's no alternative but to be in equities. And if policy can remain supportive enough, and crucially, if China's economy can pick up a bit, the ASX200 can sustain this upward trend throughout the year."

6. Energy remains attractive

Surging energy costs have been a major story in late 2021.

In fact, it is one of the main reasons inflation concerns are spiking as rising energy costs are passed on to consumers.

While green technology is likely to continue to play a role, Morningstar stated that it is "not blindly optimistic about oil and gas, but transition could take longer than markets think."

As such it states energy could be the biggest opportunity for investors from a valuation perspective.

"Energy remains the most undervalued sector, trading on an average price/fair value estimate ratio of 0.75 despite the favourable earnings outlook on high coal, gas, and oil prices," Adrian Atkins senior equities analyst at Morningstar said.

At the same time it states technology and consumer cyclical stocks are most overvalued, trading on an average price/fair value of 1.24.

7. Australian shares tipped to outperform

In good news for investors in the ASX, experts believe the Australian market will outperform.

"Australian shares are likely to outperform (at last) helped by stronger economic growth than in other developed countries, leverage to the global cyclical recovery and as investors continue to search for yield in the face of near zero deposit rates but a grossed-up dividend yield of around 5%. Expect the ASX 200 to end 2021 back around 7,800," Dr Oliver concludes.

Get more from Finder

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.
Go to site