Daily Brief: How To Invest In 2022 For Your Very Own Fairytale Ending

Daily Brief: How To Invest In 2022 For Your Very Own Fairytale Ending

about 2 years ago3 mins

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Economists have high hopes for the global economy in 2022, but a lot rides on whether central banks serve something up that’s too hot, too cold, or just right.

What does this mean?

Economists reckon the “real” – that is, inflation-adjusted – global economy will grow by 4.4%, driven primarily by the US, Europe, and China’s respective 3.9%, 4.2%, and 5.3%. But there’s a catch: that growth – motivated primarily by a recovery in consumer spending and a declogging of supply bottlenecks – could continue to push up prices, which is why economists are expecting inflation to hit 3.5% around the world next year. That might encourage the Federal Reserve (the Fed) to hike interest rates as soon as mid-2022, even if the European Central Bank (ECB) has said it’s not planning to do the same until at least 2024. But if inflation keeps bearing down on the region, it might be forced to change that position pronto…

Fed rate hikes
Source: Statista

Why should I care?

For markets: What’s a central bank to do?

The Fed is in a pickle: if the central bank makes borrowing more expensive by raising rates, it risks limiting economic growth as much as it does inflation. American shoppers only have so much cash to spend, after all, and they’re likely to buy fewer nice-to-haves if they’re confronted with expensive price tags. The Fed, then, needs to time its rate rises perfectly next year to enjoy the best of both worlds.

The bigger picture: Put down the dollar.

Goldman Sachs is expecting non-US stocks to do well next year, which doesn’t bode especially well for the US dollar. A wider choice of potential winners could encourage investors to sell their dollar-denominated American stocks in favor of those denominated in foreign currencies, which would push down the former’s currency versus others around the world.

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What's On The Horizon For Stocks In 2022

Markets preview image

Stocks could be set for another strong year in 2022, even if company valuations end up going nowhere fast.

What does this mean?

The key US and European stock indexes – the S&P 500 and the Stoxx 600 – climbed 30% and 22% respectively this year. And Goldman Sachs thinks both will carry that momentum into next year, estimating that the S&P 500 will be 9% higher and the Stoxx 13% higher this time next year.

Goldman SP 500

That’s all well and good, but the investment bank also argues that the S&P 500’s “price-to-earnings ratio” – a key valuation measure – won’t budge much. See, it’s true that shoppers are more likely to be out and about next year, pushing up expectations of companies’ profits and, by extension, their valuations. But it’s also true that any boost this provides could be offset by interest rate hikes, which would make safer investments more appealing at stocks’ expense, in turn lowering stocks' valuations.

Why should I care?

For markets: Is this tech’s swansong?

Analysts still have their reservations about the US stock market, mostly because just 10 companies – including Apple, Microsoft, and Amazon – are responsible for around 30% of its value. If these stocks were to collapse, then, the entire index could too. This is nothing new, admittedly, and investors have blithely continued to buy their shares for years. But 2022 could finally be the year they fall out of favor…

US market

For you personally: Goldman’s recommendations.

First up, buy into companies – think consumer staples, which sell everyday essentials – that can pass price rises onto their customers without losing them to the competition. Second, avoid those with high workforce costs, since those costs are only going to get higher if wages keep rising. Third, “growth” stocks – those of fast-growing companies – are probably fine, but avoid unprofitable ones, which will be most at risk if interest rates rise.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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