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How the stock market could react in 2022 as the Omicron variant sparks fear


How the stock market could react in 2022 as the Omicron variant sparks fear

Worries about the omicron variation of Covid-19 have rippled through world stock indexes.

A year ago, the average stock strategist might not have seen that the world’s best-performing index in 2021 would be Mongolia, or that a movie theater chain would grow 13 times.

And while many are optimistic, a few have predicted the sheer intensity of the rally that has propelled European and US stocks to consecutive records, or the drop following the appearance of the variation. omicrons of Covid-19. Even less forecast a drop in China or a liquidity crunch affecting the nation’s developers.

In short, it was a year full of surprises – that’s the least surprising thing about it. It won’t be easier to capture insights in 2022 – but some broad themes will likely persist.

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Covid-19

The evolution of the pandemic has been the main driver of the market for almost two years, causing a crash in 2020 and then a protracted rally thanks to vaccination programs that allowed the economy to open up. return. And now worries about omicron variation have rippled through world stock indexes.

Most strategists expect the virus to become a footnote next year, when the advent of anti-virus pills from Pfizer Inc. and Merck & Co. has added to humanity’s arsenal to fight deadly infections. This majority view has not changed in the face of warnings that the new strain of bacteria may not respond to existing treatments.

However, if there’s one thing the pandemic has taught us, it’s that strategic equity is one thing, epidemiology is another. And even as the virus becomes an endemic nuisance, the limited spiral to isolate those infected “is becoming a more persistent drag on growth,” said Romain Boscher, chief investment officer global equities at Fidelity International.

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Even if the virus disappears from our lives, that will still have the potential to determine the direction of the stock market, as there will be no more grounds for monetary and financial stimulus – two of the biggest moves in the world. the main force leading to this year’s outstanding development.

Inflationary

Markets have watched prices skyrocket this year, and for good reason, as soaring corporate earnings demonstrate that companies can pass higher costs on to consumers still willing to spend. .

If inflationary pressures ease in the coming months, don’t expect a slight rally, as that’s what stocks have priced in. Strategists at Inc. Dominic Wilson and Vickie Chang wrote in a note.

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If the price pressure continues or even increases, things could get complicated. Stocks are only a good hedge against inflation up to a certain point, which Oddo BHF, WallachBeth Capital and Lombard Odier put at 3% to 5%. According to Florian Ielpo, head of macros and multi-assets at Lombard Odier, price growth beyond 4% will erode profits and harm equities.

High inflation will also put pressure on central banks to tighten policy, thereby increasing borrowing costs for highly indebted countries, such as Italy, and depleting their liquidity. market. Federal Reserve Director Jerome Powell drew his first bloodline last week, warning of the possibility of a faster decline in asset purchases.

Morgan Stanley’s Graham Secker says the impact of a possible European Central Bank debt relief on Europe’s peripheral debt is one of the biggest downside risks next year, while strategies of JPMorgan Chase & Co. considers the hawkish turn of the central banks as the main downside to their bullish outlook.

Decarbonization

One reason inflation is likely to continue structurally higher is a transition to climate neutrality, a goal the world’s largest economies – from the US to India – are committed to. end this year. Higher carbon prices and environmental taxes increase production costs for industries, while less investment in fossil fuels has contributed to increased energy costs, which threatens to depress growth. and break the output.

On the other hand, asset managers from BlackRock Inc. to Nuveen says that decarbonization creates an unprecedented investment opportunity. For example, look no further than electric cars: shares of Tesla Inc. has increased more than 1,000% since the beginning of last year, while the market value of Rivian Automotive Inc. quickly skyrocketed to more than $100 billion after launching trading last month, even though its sales were essentially non-existent.

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With the Greens now at the helm of government in Europe’s largest economy, decarbonisation stocks are likely to rise after slumps this year for companies like Siemens Gamesa Renewable Energy SA and Vestas Wind Systems A /S.

Metaverse

Facebook’s rebranding has drawn attention to a growing space of economic activity outside of the real world, from social networks to gaming platforms. Chipmaker Nvidia Corp. and video game company Roblox Corp. just two of the stocks that have surged in the short term after Mark Zuckerberg renamed the company he co-founded to Meta Platforms Inc.

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The Metaverse — the digital world where users can socialize, play games, and conduct business — is a trillion-dollar opportunity, according to Epic Games Inc CEO Tim Sweeney.

Currently, a digital Gucci bag model, which can only be used in the gaming platform universe, can be more expensive than the physical version. That’s because people in developed countries now spend more time online than interacting in physical spaces, according to Morgan Stanley. While the move has accelerated with stay-at-home orders during the pandemic, it is expected to continue in the coming years and possibly succeed as Apple Inc. join the group.

China

Beijing has taken revolving measures to limit the profits of tech giants and tutoring firms this year, and imposed lending restrictions on property developers. to cut dependence on this sector. At the same time, high factory prices make it difficult for companies to maintain profit margins, while the lack of any significant easing measures by the central bank in recent months has affected to economic growth.

Chinese foreign stocks in Hong Kong have been among the world’s worst-performing markets this year, while the Nasdaq Golden Dragon China Index is down more than 50% from its February peak. The MSCI China index is near its lowest level against global stocks since 2006.

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However, many global institutions are turning more constructively towards Chinese stocks.

BlackRock thinks the peak of regulation has passed and expects more pro-economy measures to start to have an impact in the new year, while BNP Paribas predicts Beijing will adjust its policies towards developers. real estate development and private sector support at this month ‘s key economic meeting .

“We believe the time to take a position is now,” BlackRock Portfolio Manager Lucy Liu said in a press conference Nov.

Goldman Sachs is optimistic about investment opportunities tied to President Xi Jinping’s “common prosperity” campaign, such as renewable energy. And UBS Group AG says tighter regulations have been priced in while corporate earnings and valuations are set to improve.

And longer …

Keeping these topics up to date will not necessarily guarantee meaningful returns for investors. Potential black or white swan events are lurking everywhere: from the US midterm elections to the French President’s vote, and from tensions in Taiwan to a full-blown crisis in the economy. Turkish economy after the fall of the lira. Supply chain bottlenecks will continue to be closely watched, while global warming is another sign that traders may need to watch out for.

It is therefore not surprising that there is no consensus among the world’s most famous strategists on the direction of the stock market: while Max Kettner of HSBC Holdings Plc advises investors to start buying stocks in the first half of next year and things will light up. In the second half of the year, UBS Global Wealth Management predicts exactly the opposite – a good start followed by a worsening outlook towards the end of the year.

While Goldman Sachs sees the market moving higher next year, Bank of America Corp. Again, it is quite bullish, predicting lows or negatives and in any case volatile returns in 2022.

And if we’ve learned anything from 2021, it’s that focusing on the fundamentals of the companies you invest in isn’t always the most rewarding strategy. By ignoring such guidelines, some retail investors made serious money last year, with AMC Entertainment Holdings up about 1,200% and GameStop Corp. back more than 800% for no apparent reason than a social media craze fueled.

Going forward, Goldman Sachs advises investors to be selective, avoid companies with high labor costs and stocks that are priced purely on long-term growth expectations. But then again, that’s just what strategists advised last year.

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