Investing for 2022: Three expert views

Investing for 2022: Three expert views
The big themes globetrotting investors need to keep in mind.
Gemma Boothroyd
January 13, 2022

Forget popping the bubbly and tossing the confetti. Here at Freetrade, celebrating the new year is all about taking a fresh look at our investing playbook. 

It’s the perfect opportunity to hit the refresh button on how we foresee the landscape changing in 2022. Dan Lane, Paul Allison and Gemma Boothroyd dive into what that could mean for investing in the US, UK and Europe this year. 

UK: a value playground, for now

Dan Lane, senior investment writer

The UK looks achingly cheap compared to other markets, particularly the US. But cheap doesn’t automatically mean good value. And no amount of cheapness will make a bad company good. 

That’s one of the reasons the UK hasn’t had the same post-March 2020 snap back as the market across the pond. It just looks a bit fuddy duddy next to the slick tech titans.

MSCI Forward P/E

MSCI forward PE
The UK is still bottom of the pile when it comes to global market valuations. Price divided by 12-month forward consensus expected operating earnings per share. Source: I/B/E/S data by Refinitiv, As at 12 Jan 2022.

That said, if the trajectory for interest rates starts to look more solid, some of the companies that suffered because of their seemingly outdated image could start to look more attractive. 

Banks and insurance firms have already perked up on December’s rate rise and could start to motor if this environment gets sturdier.

Travel and hospitality firms could spring back if Omicron fears continue to ease too.

Ultimately, with a lot of valuations across unloved UK firms sitting below 10x earnings, this looks like a value investor’s playbook. But green shoots of a value rotation have made fools of the best of us over the past few years, not least around this time last year when we all hoped Covid was a thing of the past (if only).

A key thing to be careful of in 2022 is leaping on the pummelled businesses that were struggling long before the virus struck. While other firms might be feeling the pressure temporarily, the pandemic might have accelerated the overall demise of the stragglers.

Focus on which firms have the cash to last another difficult year, if that’s what 2022 turns out to be, and get a feel for how nimble management teams have been over the past few years. A steady hand is good in a crisis, and it’s even better on the road out of one.

US: rate-setters, start your engines 

Paul Allison, head of equity research 

2022 feels like an awfully important year for monetary policy setters in the US.  

Having doused the world with money over the last 15 years to put out the flames of two supposedly ‘once in a lifetime’ crises - the financial crisis in 2008 and now the pandemic - it looks like crunch time.  

The problem is that the supply-demand imbalance caused by Covid-related restrictions is driving up prices and could be the spark that lights an inflation inferno.

US CPI Ex Food and Energy

US CPI Ex Food and Energy, Yardeni GDP Country charts. Source: Bureau of Economic. Analysis data by As at 12 Jan 2022.

In response, the Federal Reserve (Fed) is being proactive about signalling its interest rate policy and bracing us for rate rises and tighter monetary conditions.  

The market has reacted as it generally always does at the start of a rate cycle, and sold off And that selling has been felt most intensely in the areas of the market where valuations are impacted the most by higher rates, namely growth stocks.

Inflation is also a bit of a double-edged sword.  With indebtedness running high in the US a little inflation helps to reduce that debt level over time (in real terms).  

Of course too much inflation will need more rapid interest rate increases which will only add to the burden of the already high debt levels.  It's fair to say the Fed is walking an inflation tightrope.

If it really is the beginning of the end of Covid though, then US economic growth will likely remain firm and be able to absorb the rate increases.  It is also worth remembering that rate rises are usually a sign of a healthy economy and a nice backdrop for stock markets.

During the most recent period of rate rises (September 2015 - June 2019) the US equity market rose significantly, with the technology sector ETF more than doubling.  The worst performing sector over that time period was energy which stayed broadly flat.  That’s food for thought given the recent strong performance of energy stocks, perceived as value/cyclical stocks, and the weakness of technology stocks.

It remains key to focus on the long term and put company fundamentals front and centre of your mind.  

The US market is very fertile ground for world-leading companies that have track records of consistent financial performance.  It wouldn’t surprise us if 2022 was another such year.    

Europe: head in the sand or the right way out?

Gemma Boothroyd, investment writer

As nations around the world announce intent to do the very opposite, the European Central Bank (ECB) seems steadfast on avoiding an interest rate hike just yet. 

Given eurozone inflation rocketed up to levels not seen since the Euro first came to be, the ECB’s subdued (lack of a) reaction may strike as surprising.

But in response to new consumer price index highs, the ECB simply insisted inflation had peaked. And in true “what comes up, will come down” fashion, it’s decided a rate rise is premature for now.

Likely, that’s thanks to optimism that Europe is continuing along in its consumption-led economic recovery. 

Eurozone household spending

Eurozone Household Spending Source: Statistical Office of European Communities by As at 12 Jan 2022.

US Goods Consumption

US Goods Consumption, Yardeni GDP Country charts. Source: Bureau of Economic Analysis data by As at 12 Jan 2022.

While goods consumption and household expenditures are not equal proxies, they paint a big picture of spending differences between the regions. Europe’s consumers appear to have some renewed optimism, and are perhaps a bit more cash flush than their American counterparts. 

If Europe is indeed in the middle of its economic cycle, equities should continue to prosper. That’s good news for the region’s cyclical stocks, for instance those in the auto industry, of which Europe has many.

And unlike what we’re seeing in the US, a full tilt away from growth stocks may not be entirely necessary. For starters, European stocks are less overvalued than those in the US (as Dan Lane’s above graph shows) to begin with. 

Even if its valuations are an easier pill to swallow, there’s room for eurozone volatility ahead.

Lockdowns were still lurking as 2022 began, so travel and leisure stocks which managed a rebound mid-2021 could be back in the dumps. 

It might be a while until these rebound, and upcoming elections (like the French presidential campaign in April) only highlight more uncertainty for the road ahead. 

What's your 2022 investment outlook? Let us know on the community forum:

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