Key topics dominating stock markets going into 2022

Climate goals, inflation, de-consolidation and geopolitics to dominate markets
With Cop26 climate summit in Glasgow having reached its conclusion, we see a better framework in place to push listed firms to disclose their emission levels in hope that capital markets will force the changes needed to help lessen the pace of global warming. Although many came away disappointed, particularly in lack of pledges to reduce coal consumption by key countries and the missing financial assistance commitments needed to help developing countries do their part, we still see stock markets being quickly reshaped by the ambitious decarbonisation goals.

Another major issue remains global inflation as much hotter readings coming through is blowing away the notion that rising prices will prove transitory. As we have argued, although some of the inflationary forces in play are likely to weaken as Covid’s impact on the supply chain start to ease and as global economic recovery broadens more towards services, we continue to think US long term rates are heading higher as wage and rent inflation look to be far more entrenched. This is a key assumption behind our bullish views on Japan’s highly cyclical stock market which has been moving up and down with US long bond yields for much of this year. 

One other notable market trend emerging is the de-consolidation of conglomerates with Toshiba, General Electric and Johnson & Johnson all looking to break up their convoluted corporate structures to enhance shareholders value. Although it is hardly surprising to see bankers cheering for this given the promising fat fees that they entail, the era of ‘bigger is better’ is seemingly coming to an end. This trend is likely to gain momentum in 2022, especially in Japan where companies like Hitachi, Fujitsu and NEC have already led the way through major divestments while many other sleepy giants have for decades nursed value destructive business units. 

Moving on to geopolitics which we think poses the biggest danger for next year through potential for tighter export restrictions to China, much is riding on the virtual summit between Mr Biden and Mr Xi, scheduled to take place this week as hopes are that this meeting could ease tensions between China and the US. However, hawkish political climate in their respective nations is unlikely to allow for much compromises, besides perhaps establishing a more cooperative framework in reaching the lofty climate goals. Although there are no plans for a joint statement to get an immediate read on the conclusion of the summit, we are not as hopeful that the steady march towards a cold war can be reversed anytime soon.