Ever since the covid pandemic hit the world in February -March 2020, the global financial markets have seen many highs and lows, with several stocks crashing badly and turning in red.
However, after many jolts in the financial markets, some industries, especially the healthcare and pharma sector, saw their share all-time-high, perhaps due to high consumers demand and stimulus packages announced by the respective governments.
Moving ahead now, 2022 will be a critical year in which the imbalances wrought by the pandemic will likely begin to resolve and the business cycle normalizes.
According to a report by Morgan Stanley, the economic and market environment in 2022 will be decidedly reflationary, with higher economic growth and higher inflation, and eventually higher real interest rates—in short, a hotter and shorter business cycle.
Here are four trends that could further drive higher-than-expected growth and inflation, with greater capital spending and improving productivity:
Innovation: During pandemic-related shutdowns, service businesses were forced to innovate digitally. This has spurred not only investment but an explosion in start-ups, as well as historic levels of public and private market activity—from fintech and cryptocurrencies to autonomous vehicles and artificial intelligence.
Deglobalization: Businesses were already contemplating supply-chain localization amid U.S.-China trade tensions before the pandemic. Today’s inflation-driving supply imbalances and inventory shortages—not to mention increasing sensitivity around cybersecurity, public health, geopolitics and shifting regulatory frameworks in China—have all added momentum to this trend toward domestic sourcing.
Decarbonization: The pandemic and related business closures led to reduced fossil fuel consumption and carbon emissions and intensified pressure against investment in such energy sources. This is a reality that’s adding to cost pressures and could continue to support inflation levels.
Transformation of the US labor market: A labor crunch driven by workplace safety concerns and accelerated retirements, coupled with employees’ seeking new leverage to change jobs or demand higher wages, could continue to drive higher labor costs for companies. This, in turn, could weigh on profit margins.
Certainly, these trends suggest that investors need to be positioned not for a dearth of economic growth but an abundance of it. Higher growth and inflation will likely translate to higher nominal and real interest rates and a steepening of Treasury yield curves, with price/earnings multiples compressing in the more rate-sensitive sectors.
Thus, when it comes to retooling investment portfolios for 2022, the focus should be on the many “technology takers”—companies likely to drive increased tech adoption—not the few technology makers.