Weekly Brief: 2022 Could Call For A Redesign Of Your Portfolio

Weekly Brief: 2022 Could Call For A Redesign Of Your Portfolio

about 2 years ago3 mins

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The global economy is set to look completely different in 2022, which means the layout of your portfolio might need a rethink too…

🕰 Recap

  • Investment banks generally aren’t convinced that stock markets will repeat their strong 2021 performances
  • Not least because they’re worried about US interest rate hikes, which, it emerged this week, could arrive much sooner than expected
  • You can’t blame the Federal Reserve, though: the latest inflation data out of the US showed consumer prices rising at their fastest rate in nearly 40 years

✍️ Connecting The Dots

What a difference a year makes. Central banks spent most of 2021 claiming that inflation is just the “transitory” result of post-pandemic hiccups. But as consumer prices continued to shoot up every month and repeatedly hit multi-decade highs, that argument started to look increasingly flimsy. Some central banks, then, shifted their tones at the end of 2021 – most notably the US Federal Reserve. In fact, new details from the Fed’s December meeting suggest US interest rate hikes could arrive a lot sooner and faster than expected.

The details also revealed something else more worrying for investors. The Fed has bought more than $4 trillion worth of bonds since the pandemic started, in an effort to push down their yields and, in turn, the cost of borrowing. But it’s now emerged that the Fed is thinking about selling off some of this massive amount. That would push bond prices down and their yields up – not great news for existing bond investors.

Rising bond yields are also putting investors in fast-growing tech firms on edge. See, investors value a stock based on what a company’s future profit is worth today, and that future profit is worth less when yields are on the rise. Problem is, the appeal of tech firms’ stocks mostly comes from the sheer potential of their future profits, and investors are less likely to buy in – and more likely to sell up – if they start to decline.

🥡 Takeaways

1. It’s becoming harder to diversify.

What’s bad for tech stocks is bad for the wider US stock market. After all, Amazon, Meta (formerly Facebook), Apple, Microsoft, Alphabet, Tesla, and Nvidia collectively make up more than a quarter of the key US stock market index, the S&P 500. That means rising bond yields could knock US investors’ bond and stock portfolios whether or not they’re invested in tech. And even traditional “safe haven” gold might not be able to help: the metal – which generates no income – becomes less attractive to hold when bonds start to offer higher yields.

2. Value stocks could offer a solution.

Economists are optimistic about global economic growth in 2022. And when overall economic growth rises, fast-growing tech stocks become comparatively less attractive since growth is no longer scarce. Investors, then, start to shift their attention to cheaper value stocks: that is, companies underappreciated by the market, which could deliver decent earnings if the economy keeps improving. What’s more, while fast-growing tech stocks are very much sold on the promise of their future profits, value stocks have decent profits today, making their valuations less sensitive to rising bond yields.

🎯 Also On Our Radar

The meme-stock frenzy met the NFT craze this week: GameStop, the retail investor darling that saw its stock price rise almost 700% last year, announced late on Thursday that it’s planning to create an NFT marketplace. What a coincidence: the announcement came just two days after it emerged that OpenSea, the world’s biggest NFT marketplace, was valued at $13.3 billion in its latest fundraising round…

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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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