Interest rate hikes and rising inflation could lead to a “more volatile” market in 2022

2021 is unlikely to become anyone’s favorite year, with the Delta variant (and now Omicron) spreading across the world like wildfire.

But there were a few bright spots, especially for those who bought shares during the lockdown.

Australia’s main stock index, the ASX 200, has jumped around 14% year-to-date and is trading near record highs. The larger All Ordinaries index performed slightly better (up 14.5 percent).

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

The ASX 200 has grown an average of 8% per year since 2011.(Motley Fool, S&P Global)

“This has been one of the most important years for retail investors to get involved in investing,” said Evan Lucas, chief market strategist at InvestSMART.

Overall, the markets didn’t care about the spike in infections, sudden border closures, or the economic damage caused by widespread COVID restrictions.

Instead, investors took a “half-full” approach by betting on increased vaccination rates, an economic rebound and higher profits for the companies in which they bought shares.

And with interest rates at historically low levels, TINA (short for “There is no alternative”) was the dominant investment mantra – as investing in the risky stock market was seen as a risk. better option than to earn almost nothing with the bank.

Line graph comparing the returns of stocks versus term deposits.
Stock markets are trading near record highs as interest rates drop to zero.(Bloomberg, AMP Capital)

The ups and downs

So how good has the ASX 200’s annual gain (14%) been compared to overseas markets?

It wasn’t as strong as Wall Street – the Dow Jones Index (up 19%), the S&P 500 (up 27%) and the Nasdaq (up 22%) had much higher returns students.

In Europe, the German DAX rose 15.6%, while the MSCI World index gained 20.6%.

But the Australian market outperformed its Asia-Pacific peers.

This includes Japan’s Nikkei (up 5.3%), Shanghai Composite (up 3.6%), New Zealand’s NZX 50 (down 1.2%) and the Index Hang Seng of Hong Kong (down 15%).

Taking a closer look at the ASX 200, most industrial sectors saw gains in 2021, according to data from Refinitiv:

  • Telecommunications (+ 29.4%)
  • Consumer discretionary (+ 23.2%)
  • Financial (+ 21.8%)
  • Real estate (+ 20.5%)
  • Industrial (+ 11.6%)
  • Health (+ 8.9%)
  • Consumer Staples (+ 8.1%)
  • Materials (+ 6.8%)
  • Public services (+ 4.9%)
  • Energy (- 1%)
  • Technology (-2%)
Line graph showing ASX 200 reaching record highs in 2021.
The ASX 200 increased by 14% in 2021.(CommSec, Iress)

And here are some of the best and worst performing stocks in the Australian market in 2021:

Worse

Better

Laïc Achat (- 82%)

Cetire (+ 685%)

Splitit (- 82%)

Novonix (+ 655%)

Ora Banda Mines (- 79%)

Resources of Liontown (+ 449%)

Clean space (- 78%)

AVZ Minerals (+ 350%)

Damstra (- 77%)

Imugene (+ 335%)

Nuix (- 73%)

Vulcan Energy (+ 283%)

Zoonos (- 72%)

Pilbara Minerals (+ 264%)

Ecofibre (- 69%)

Paladin Energy (+ 248%)

Lemonade (- 69%)

Tuas (+ 183%)

Greenland Minerals (- 69%)

Australian ethical investment (+ 159%)

Magellan Financial (- 61%)

Lynas Rare Earths (+ 154%)

Source: Refinitiv Eikon

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ASX drops to seven-week low amid woes of Omicron COVID variant(David Chau)

Inflation and future rate hikes

Market analysts generally expect 2022 to be a positive year for stocks as economies continue to reopen, despite Omicron’s setback.

But some volatility is likely, as the cost of living (or inflation) continues to rise – which will push the Reserve Bank of Australia and its international counterparts to increase interest rate hikes and reverse their measures. COVID-19 emergency stimulus package.

“Closures and lockdowns have affected manufacturing output, reducing the amount of product available,” CommSec economists wrote in a research note.

“But consumers are back in the malls and more and more businesses are back online, looking for very scarce raw materials and finished products. As a result, prices are rising.

“Central banks initially believed that the spike in consumer prices would be temporary, due to supply disruptions and pent-up demand from the lockdowns.

But political leaders, including US Federal Reserve Chairman Jerome Powell, have since backed down from calling price hikes ‘transient’ with annual inflation rates reaching decades-long highs – well beyond targets. from the central bank by about 2%. “

AMP Capital’s chief economist, Shane Oliver, predicts a 10% increase in the Australian equity market in 2022 (and an increase of around 8% in the global market).

He also expects investors to sell off their “growth and technology-heavy US stocks” and look to “more cyclical markets in Europe, Japan and emerging countries.”

“Inflation, the start of Fed rate hikes, US midterm elections and China / Russia / Iran tensions are expected to lead to more volatile developments than in 2021,” wrote Dr Oliver in its year-end forecast.

“The midterm election years normally see below-average returns for US stocks, and since 1950 have seen an average 17% top-to-bottom decline, usually followed by a stronger rebound.

“Australian stocks are expected to (finally) outperform thanks to stronger economic growth than in other developed countries, leverage on the global cyclical recovery and as investors continue to seek yield against close deposit rates.” zero but at a premium dividend yield of around 5 percent.

He also signaled that the outcome of the Australian federal election (which is slated to take place by May) could lead to some volatility – but said that “if the policy differences remain minor, a change of government would have little impact” .

What to expect in 2022

We’ve also put together some recommendations from several market analysts on where they think the Australian market is going.

Here are some of their predictions for the coming year, but don’t forget to do your own research and get independent financial advice as well.

Reece Birtles (Martin Currie, Chief Investment Officer)

“The positive impact of the reopening is one of the main investment themes for the holdings of all of our portfolios.

“Another investment theme is driven by climate change and the increased focus on net zero coming out of COP26.

“We will see opportunities for what we call ‘carbon transformers’ – companies that are at the heart of renewable energy production and infrastructure opportunities, or energy consumption over the next decade. “

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Evan Lucas (InvestSMART, Chief Markets Strategist)

“There are some clear themes that gained momentum before COVID, but just accelerated during the pandemic, which will only get stronger.

“Digitization is clearly one of them, the rise of online shopping and tech stocks, along with health and climate change. Air pollution is clearly going to be a problem in the future.

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 of the big secular themes on weakness – everything to do with cloud computing, space, and data analytics. In Australia we have big tech companies, and healthcare is a great investment.

“The biggest risk will probably come from the United States. If the Federal Reserve decides to cut or cut its bond buying program faster – and raise interest rates faster – it could create a massive sell-off in the U.S. stock market.

“Typically, when this happens, other markets like Australia can follow.”

Julia Lee (Burman Invest, founder)

“I think 2022 will be a year in two halves. In the first half of the year, markets anticipate a possible weaker growth scenario with high inflation.

“If we see slower growth and high inflation, the market will turn to some of these more defensive assets.

Already, a expectation around ‘lower interest rates for longer’ has seen things like tech stocks rise.

“However, a higher interest rate environment would be negative for these high growth stocks, like technology stocks.

“In the second half of the year, we expect to see global growth really accelerate.”

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

Stephen V. Lee