Interest rate hikes and rising inflation may lead to ‘more volatile’ market in 2022


It's unlikely that 2021 will go down as anyone's favourite year, with the Delta variant (and now Omicron) spreading across the world like wildfire.

But there were some bright spots, especially for those who bought shares during lockdown.

Australia's main stock index, the ASX 200, has jumped by around 14 per cent since the year began, and is trading near record highs. The broader All Ordinaries index fared slightly better (up 14.5 per cent).

It was a much stronger performance compared to previous years — except 2012, 2013 and 2019.

The ASX 200 has risen by an average of 8 per cent each year since 2011.(Motley Fool, S&P Global)

"It's been one of the biggest years ever for retail investors to get involved with investing," said Evan Lucas, chief market strategist at InvestSMART.

"The number of new accounts and people entering the market at the start of the year hit a new record. Because of COVID, more people are at home asking themselves: what can I do to increase my wealth?"

Markets overall didn't care about surging infections, snap border closures, or the economic damage from widespread COVID restrictions.

Instead, investors took a "glass half-full" approach as they bet on rising vaccination rates, an economic rebound and higher profits for the companies they bought shares in.

And with interest rates at historic lows, TINA (short for "There Is No Alternative") was the dominant investment mantra — as punting on the risky share market was seen as a better option than earning almost nothing with the bank.

Share markets are trading near record highs as interest rates fall to zero.(Bloomberg, AMP Capital)The highs and lows

So how good was the ASX 200's yearly gain (14 per cent) compared to markets overseas?

It wasn't as strong as Wall Street — the Dow Jones index (up 19 per cent), S&P 500 (up 27 per cent) and Nasdaq (up 22 per cent) had much higher returns.

In Europe, Germany's DAX rose by 15.6 per cent, while the MSCI World Index gained 20.6 per cent.

But the Australian market performed better than its peers in the Asia-Pacific.

That includes Japan's Nikkei (up 5.3 per cent), the Shanghai Composite (up 3.6 per cent), New Zealand's NZX 50 (down 1.2 per cent) and Hong Kong's Hang Seng index (down 15 per cent).

Taking a deeper look at the ASX 200, most industry sectors posted gains in 2021, according to Refinitiv data:

  • Telecommunications (+ 29.4%)
  • Consumer discretionary  (+ 23.2%)
  • Financial (+ 21.8%)
  • Real estate (+ 20.5%)
  • Industrial (+ 11.6%)
  • Healthcare (+ 8.9%)
  • Consumer staples (+ 8.1%)
  • Materials (+ 6.8%)
  • Utilities (+ 4.9%)
  • Energy  (- 1%)
  • Technology ( -2%)

The ASX 200 rose by 14pc in 2021.(CommSec, Iress)

And these were some of the best and worst performing stocks on the Australian market in 2021:

Worst

Best

Lay Buy (- 82%)

Cettire (+ 685%)

Splitit (- 82%)

Novonix (+ 655%)

Ora Banda Mining (- 79%)

Liontown Resources (+ 449%)

Cleanspace (- 78%)

AVZ Minerals (+ 350%)

Damstra (- 77%)

Imugene (+ 335%)

Nuix (- 73%)

Vulcan Energy (+ 283%)

Zoono (- 72%)

Pilbara Minerals (+ 264%)

Ecofibre (- 69%)

Paladin Energy (+ 248%)

Limeade (- 69%)

Tuas (+ 183%)

Greenland Minerals (- 69%)

Australian Ethical Investment (+ 159%)

Magellan Financial (- 61%)

Lynas Rare Earths (+ 154%)

Source: Refinitiv Eikon

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume.WatchDuration: 3 minutes 35 seconds3m 35s ASX tumbles to seven week low over COVID variant Omicron woes(David Chau)Inflation and rate hikes ahead

Market analysts are generally expecting 2022 will be a positive year for stocks as economies continue to reopen, despite the Omicron setback.

But some volatility is likely, as the cost of living (or inflation) continues to surge — which will pressure Australia's Reserve Bank and its international counterparts to hike interest rates hikes and unwind their emergency COVID-19 stimulus measures.

"Shutdowns and lockdowns hit manufacturing production, reducing the amount of available goods," CommSec economists wrote in a research note.

"But consumers are back in the malls and more businesses are back on line, wanting the very raw materials and finished goods that are in relative short supply. As a result, prices are rising.

"Central banks initially thought that the spike in consumer prices would be temporary, owing to supply disruptions and pent-up demand in lockdowns.

"But policy chiefs, including US Federal Reserve Chair Jerome Powell, have since back-pedalled from labelling price rises as 'transitory' with annual inflation rates hitting multi-decade highs — well in excess of central bank targets of around 2 per cent."

AMP Capital chief economist Shane Oliver is predicting a 10 per cent rise for the Australian share market in 2022 (and the global market to lift by around 8 per cent).

He also expects investors to sell down their "growth and tech heavy US shares" and rotate towards "more cyclical markets in Europe, Japan and emerging countries".

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"Inflation, the start of Fed rate hikes, the US mid-term elections & China/Russia/Iran tensions are likely to result in a more volatile ride than 2021," Dr Oliver wrote in his end-of-year forecast.

"Mid-term election years normally see below average returns in US shares and since 1950, have seen an average top-to-bottom drawdown of 17 per cent, usually followed by a stronger rebound.

"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 per cent."

He also flagged that the outcome of Australia's federal election (expected to be held by May) may lead to some volatility — but said "if the policy differences remain minor, a change in government would have little impact".

What to expect in 2022

We have also gathered some recommendations from several market analysts about where they think the Australian market is headed.

Here are some of their forecasts for the year ahead — but please remember to also do your own research, and obtain independent financial advice.

Reece Birtles (Martin Currie, chief investment officer)

"The positive impact of reopening is one of the biggest investment themes for holdings across all of our portfolios.

"Infrastructure build will also be important moving forward, with both large-scale infrastructure projects and residential communities supported by the stimulus spend, demand and strong house prices.

"A further investment theme is being driven by climate change and the increased focus on net zero coming out of COP26.

"We will see opportunities from what we call the 'carbon transformers' — companies that are central to the opportunities in renewable energy generation and infrastructure, or energy consumption over the next decade."

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume.WatchDuration: 1 minute 42 seconds1m 42s Why investors are pouring money into ethical investingEvan Lucas (InvestSMART, chief market strategist)

"There are clear themes that have been gaining momentum before COVID, but have just accelerated during the pandemic, which are only going to get stronger.

"Digitalisation is clearly one of them, the rise of online buying and tech stocks, along with health and climate change. Air pollution is clearly going to be a problem going forward.

He recommends "investing in things that help electric vehicles". They include companies that produce platinum, palladium, copper and nickel.

Danielle Ecuyer (Shareplicity, author)

"I personally remain a buyer of all the major secular themes on weakness — anything in cloud computing, space and data analytics. In Australia, we've got some great technology companies and healthcare is an excellent investment.

"The biggest risk is probably going to come out of the US. If the Federal Reserve decides to taper or reduce its bond buying program more quickly — and raise interest rates more quickly — that could create a sell off in the US share market.

"Typically, when that happens, other markets like Australia can follow."

Julia Lee (Burman Invest, founder)

"I think 2022 will be a year of two halves. In the first half, the markets are pricing in a possible lower growth scenario with high inflation.

"You'll probably hear the word stagflation quite a lot — stubbornly high inflation together with low growth, which isn't a great scenario for growth assets, like shares.

"If we do see slower growth and high inflation, the market will be tending towards some of those more defensive assets.

"Already, an expectation around 'lower interest rates for longer' has seen things like technology stocks being bid up.

"However, a higher interest rate environment would be a negative for those high growth stocks, like the tech stocks.

"In the second half, we're expecting to see global growth really coming through strongly."

DISCLAIMER: This article does not contain financial advice. We strongly recommend that you obtain professional advice before making any investment decisions.

Source: https://www.abc.net.au/news




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