Some key developments we anticipate for 2022
In this last weekly publication for the year, we address some of key developments that we anticipate for 2022 which we believe are worth underlining as we approach the year-end.
1) To tackle Covid first, despite recent reintroductions of lockdowns by some Western governments to contain the current wave we continue to suspect that the emergence of the Omicron variant could potentially spell the end of the pandemic. Indeed, we are seeing more concrete data emerging from South Africa which has been the epicentre of the Omicron wave that despite its high transmissibility, hospitalisation rates and Covid-related mortalities are plunging as the variant is proving far less deadly than its predecessors. We think that despite the new variant’s vaccine evading and reinfection capabilities, its dominance now as the prevalent Covid mutant could ultimately prove positive for re-opening plays which we suspect could stage a big come back in stock markets within the latter part of the first quarter of next year.
2) Another key issue remains global interest rates. As we have argued since summer, we think inflationary forces in play will prove far more persistent, even though some factors relating to logistics bottlenecks and parts shortages may fade by the first half of 2022. We have also argued that US long term rates below 2% are difficult to justify given the strength of the US economy and rising employment rates. If our above assumption about Covid proves correct, we should see US rate hikes surprise on the upside as the Fed could be forced to start moving towards a more neutral policy stance at a much quicker pace and beyond just a quarter of percentage point increase at a time. Another possibility is for the Fed to actually shrink its balance sheet to try to steepen the yield curve while it raises rates in order to help encourage banks to remain accommodative in their lending stance and avoid choking the economy.
3) We have also consistently argued that a cold war between US and China looks unavoidable and this is highly likely to disrupt global trade, especially in technology. This scenario is already unfolding as the Biden Administration is expanding its black list of Chinese companies and look to impose tougher export restrictions to Chinese corporations operating in areas such as AI, quantum computing, biotechnology, semiconductors, autonomous systems and surveillance-related fields. We believe these tougher export controls could prove particularly negative for Japanese capital goods suppliers which have fairly large order backlogs from China.
4) Although one of our 2021 surprises called for the resignation of Japan’s prime minister, Yoshihide Suga, we were ultimately dismayed that the popular LDP reformist, Taro Kano was not picked as the new leader of the ruling party. Thus far, our disappointment has proven justified as policies being pondered by Fumio Kishida’s cabinet sound unremarkable and talks of new style of capitalism has rung hollow. Indeed, proposals of potentially raising capital gains tax and most recently, introducing guidelines for corporate share buybacks indicate that government policies could prove more of a drag to otherwise a very attractively valued stock market which should theoretically outperform other majors if US long term rates resume their upward trend.
Finally, on behalf of everyone at Asymmetric Advisors, we wish all our readers a happy holiday and a prosperous 2022.