2022 Market Outlook: A Rough Year Ahead
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Thoughts on 2022
2022 will be a rough year for the markets as the world is currently riddled with the “side-effects” of massive stimulus that, arguably, was necessary to tide the global economy over the economic impact of COVID-19.
As a result of the free and easy money environment that was created to improve liquidity, motivate borrowing, investment and consumption, the world is now facing the issue of high inflation and valuation.
In this video, I would like to share with you my opinion on the 2022 market outlook for both the US and Asia markets as these are the two markets that my clients and I are predominately invested in.
Without further ado, let's get started
US Market Outlook
Since the 2020 Covid Crash, the US market, as represented by the S&P 500, had registered a return of around 120% and in 2021 alone, the US market had registered a 27% return.
Moving into 2022, I think investors have to tread carefully when investing in the US markets due to the headwinds that may cause the market to perform poorly and they are
high inflation and rising interest rate
1. High valuations
With such a stellar performance, it is to nobody’s surprise that the US market is currently overvalued.
In fact, if we were to compare the valuations of the US markets with other major markets, you will realize that the US is the only market that is currently trading significantly above its long-term average in terms of its valuation.
What this means is that people are paying too high of a price for the same dollar of earnings that they could have gotten if they invest in other markets like the Emerging Markets.
And common-sense dictates that it is never a good idea to overpay for something when you could have gotten the same thing or same value at a much lower price.
While the current prices are propped up by the market’s optimism towards the US economy, all it takes is a few disappointing events for the optimism to turn into pessimism.
When that happens, I highly doubt that the US markets can sustain their current valuations and chances are is that we will see a correction in price.
A correction in price would ensure that the US markets would trade within a more reasonable valuation that is much closer to the long-term average as compared to where they are at today.
That brings me to the next two points which may serve as a potential trigger for a shift in market sentiment.
2. Mid-term elections
With the mid-term elections set to be held on 08 November 2022, it will be a rougher time for the markets as generally, elections are associated with higher uncertainty and higher volatility.
While I am not here to forecast the outcome and implications of the election, I am here to study the past performances and draw inferences on how a mid-term election would potentially affect the market’s behaviour.
From the above chart, I think it is evident that during midterm elections, the performances of the S&P tend to be slightly lower and also more volatile as compared to all other years.
Couple the fact that we are still in a pandemic and dealing with all other issues such as inflationary pressure and rising tension and conflict between US and China, I expect the markets to be more volatile in the coming year.
3. High inflation and interest rates
Now as I have previously gone in-depth on the topic of inflation and interest rates, I will not be talking much about it in this video itself.
If you are interested to find out more about these two key important factors, you can find the link to the respective videos in the description below.
Generally, as we move into 2022, you can expect interest rates to increase.
When that happens, the cost of money increases and that would translate to a lower savings rate for consumers like you and me and lower earnings for businesses.
As investors investing in businesses, a rising interest rate environment is not beneficial to us as it eats into the earnings of the very business that we invest in which ultimately translates to lower returns.
A lower savings rate would also mean that consumers have lesser resources to invest in the market and that would dampen the demand for stocks which ultimately affects the short-term price given that short-term prices are driven by demand and supply.
Asia Market Outlook
Unlike the US market which had performed spectacularly in 2021, the Asia market has taken quite a beating due to a slur of pessimism mainly from the delta variant and the impact of the China regulatory crackdown.
That said, from the valuation’s standpoint, the Asia market is currently trading near its fair valuations, unlike the US market who is trading way above its long-term average.
Moving in 2022, I think the Asia market would present an opportunity for investors to get involved in the long-term growth story of the region at an attractive valuation.
However, investors would need to be very cautious about the headwinds that may cause the Asia market to experience more losses in the short run before things turn for the better in the long run and they are
The spillover effect from the US when they correct
Rising tension between US and China
1. Spillover effect from the US when they correct
We all know that the US is currently the global power of the world, most markets tend to be positively correlated with the US due to the influence – be it direct or indirect – that the US has on the other economy’s the trade and capital markets.
That said, Asia is no different.
If we were to examine the correlation between Asia equity and US equity, you will realize that the correlation between these two markets usually trends along the 0.7 mark.
For those who do not understand the significance of this, a positive correlation between two investments signifies that the price will move in a similar direction.
A correlation value of 0.7 signifies that the price relationship between the US and Asia market is closely aligned to a large degree.
Having said that, in an event where the US markets do go through a rough year in 2022 and correct itself back to a level near its long-term average valuation, chances are is that the price of the Asia market will experience a further decrease in its prices EVEN THOUGH they are currently trading at around its long-term valuation.
When that happens, the Asia market will reach a price that we call undervalued and that presents an opportunity for long-term investors like ourselves to invest in Asia’s long-term growth story at a discounted price.
2. Trapped between the US and China
The story that is unfolding between US and China is a story that is commonly played out when there is a shift in global positions between empires. We’ve seen that played out between the Dutch and the British, the British and US and now US and China.
Make no mistake, US and China are at war… just not a military war where they shoot one another.
The US & China is currently engaged in other kinds of war revolving around trade, economics, technology and capital wars.
As the fundamentals and global dominance of the US continues to weaken and while that of China continues to improve, the US inevitably has to make certain moves to preserve its position as a global power.
And that is is exactly what they are doing.
Now I’m not going to go into details on this topic in this video as it deserves a separate video on its own so do subscribe to the channel to stay updated when that video comes out.
Unfortunately, the Asia market and economy is heavily entangled with the US and China of which a rising conflict between the two major economics would do more harm than good for Asia in the short-run as the fear, uncertainty and doubt will increase and that will cause volatility to increase.
That said, in the long-term, my position towards Asia remains unchanged despite the developments between the two global economies as the underlying fundamental factors that will shape the regional growth in the next 10 to 15 years goes beyond just US and China alone.
You can expect the Asia markets to be sensitive to the developments between US & China in the short run but it will do very little to the long-term growth developments of the region given the underlying factors that will shape the growth in the future.
So, there you have it, that’s my take on the 2022 market outlook.
Investors should be careful when it comes to investing in 2022, especially if you are looking at the US markets given the headwinds that could potentially cause some pain in the short run.
As Albert Einstein said: “In the midst of every crisis, lies great opportunity.”
If indeed, the market goes through a rough year due to the potential headwinds, it may present a good opportunity to invest in the market especially in Asia as it would be undervalued despite having a good long-term structural growth potential.
2022 will be a rough year for all short-term investors but if you are someone that is looking to invest for the long term, keep your eyes peeled for any opportunity that may arise from this journey that we are about to experience.
The way you can do this is if you focus on fundamentals and valuations alone and not be swayed by short-term price actions. Remember price is what you pay, value is what you get.
Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner that provides:
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This article is meant to be the opinion of the author
This article is for information purposes only
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