If the year 2021 may have led to believe that the Covid crisis has ended, 2022 promises to be much more uncertain. The evolution of the pandemic and inflation as well as the attitude of central banks will have to be closely monitored, warns our columnist, Jacques Chahine, president of JAJ Investment Group and director of Chahine Capital.
After a brilliant year of recovery in 2021 when the planet came back to life intensely after the deprivations of 2020 with the waves of Covid that followed one after another, the arrival of the vaccine in early 2021 allowed all hopes. Consumption exploded to such an extent that the economy could not keep up with this demand, creating huge disruptions in the supply chain. The most critical was the scarcity of microprocessors omnipresent in all goods: the TV, the washing machine or the fridge, electronic games, smartphones and more and more in the automobile. Manufacturers have had to shut down their factories and the shortfall is $ 210 billion. Massive investments are being made in new factories, especially in the United States which have become aware of their Asian dependence, even if it is these same Asians who are creating these new factories, especially in Texas. Samsung has planned $ 205 billion over 3 years, Taiwan Semiconductor $ 100 billion, Intel $ 100 billion ... But the arrival of these new factories is scheduled for 2024 and, in the meantime, it will be necessary to track down all the existing capacities to increase the production.
These constraints did not prevent the world economy from rebounding vigorously this year, posting an increase of 5.6% of the GDP after a fall of 3.6% in 2020. If Asia and in particular China as well as the United States have largely exceeded the 2019 level, Europe has lagged behind, especially Germany, which has suffered the most from the dislocation of the supply chain. France, on the other hand, has regained ironic optimism, the French spending lavishly on services, with reservations in certain restaurants having to be made several weeks in advance. Hoteliers have never seen such a rush for the holiday season.
The flip side was a strong surge in inflation, as industry and services could not keep up with demand for a variety of reasons: rising energy and raw material costs, increases induced by outages. supply as in the automobile, increase in wages to attract employees in neglected sectors such as hotels and restaurants. The increase at the end of November reached 7% in the United States and 5% in the Eurozone, levels not seen since the 1981 oil shock. Energy is up 58% at the pump in the United States and most raw materials remain expensive. There is nevertheless an easing in the price of maritime transport which has soared. The 5% hourly wage did not cover inflation.
Soaring inflation around the world
FactSet
The year 2022 does not seem as serene as 2021, full of hope at the start of the year thanks to the arrival of several very effective vaccines. They fulfilled their role well through intensive campaigns and by the spring a wild hope was born that the crisis was coming to an end. The holidays were a dream… Unfortunately the Delta variant landed in the middle of the summer and developed a 4th wave. But unlike the other waves, the vaccination worked miracles since the impact of the Delta was very small on mortality and we hoped to live with it. And then thunderclap, Omicron landed 4 times (!) More contagious than the Delta, itself terribly contagious. The world is in total uncertainty as to the future development of the pandemic and the possibility of containing it with existing means. This is the first of the uncertainties that will weigh on the market in 2022. The evolution of inflation is the second major uncertainty that has ended up setting off all the central banks. Social tensions are perceptible to “preserve” purchasing power through wage increases which will complicate life for companies. The best indicator is the inflation induced by the rates of the bonds indexed to 10 years. After hitting a record 2.76%, it fell back to 2.38%, leaving hope that the peak in inflation has been reached and that a slowing economy will put less pressure on demand. Still, the dilemma for investors is how to protect their capital in 2022. The third risk, the most important in our eyes, is the policy followed by central banks. The Fed announced the acceleration of the end of its QE (Quantitative easing, massive purchase of debt) program now scheduled for next March. Its current balance sheet is $ 8.7 trillion. The other announcement concerns 3 rate hikes planned for next year. The yield curve adjusted quickly and the 2-year rate fell from 0.13% a year ago to 0.66%. On the other hand, this increase had no impact on long rates, which tended to fall. A 10-year bond pays 1.4% and is far from hedging inflation. For now, the market has not been surprised by the Fed, but a more virulent fight against inflation could see a sharp correction in the market as in late 2018. Its current balance sheet is $ 8.7 trillion. The other announcement concerns 3 rate hikes planned for next year. The yield curve adjusted quickly and the 2-year rate fell from 0.13% a year ago to 0.66%. On the other hand, this increase had no impact on long rates, which tended to fall. A 10-year bond pays 1.4% and is far from hedging inflation. For now, the market has not been surprised by the Fed, but a more virulent fight against inflation could see a sharp correction in the market as in late 2018. Its current balance sheet is $ 8.7 trillion. The other announcement concerns 3 rate hikes planned for next year. The yield curve adjusted quickly and the 2-year rate fell from 0.13% a year ago to 0.66%. On the other hand, this increase had no impact on long rates, which tended to fall. A 10-year bond pays 1.4% and is far from hedging inflation. For now, the market has not been surprised by the Fed, but a more virulent fight against inflation could see a sharp correction in the market as in late 2018. This increase had no impact on long rates, which tended to fall. A 10-year bond pays 1.4% and is far from hedging inflation. For now, the market has not been surprised by the Fed, but a more virulent fight against inflation could see a sharp correction in the market as in late 2018. This increase had no impact on long rates, which tended to fall. A 10-year bond pays 1.4% and is far from hedging inflation. For now, the market has not been surprised by the Fed, but a more virulent fight against inflation could see a sharp correction in the market as in late 2018.
Towards a flattening of the yield curve
FactSet
A host of other risks could emerge, such as a crash in the Chinese economy with the bankruptcy of promoter Evergrande and other colleagues, a crisis in Taiwan, tensions between Russia and Ukraine which could create a shock huge on natural gas already in madness, a systemic crisis on the Euro. We cannot exclude the bursting of a state debt bubble which is reaching peaks.
These risks are not necessarily going to materialize, the planet is working hard to counter the Covid. New vaccines are coming out of the labs and Pfizer's antiviral pill could be a game-changer. We are seeing the start of normalization in the supply chain and the decline in sea freight prices. The huge forced savings accumulated during the Covid could support the economy. The Christmas shopping went well overall. Whole swatches of workers have not returned to their jobs, but the end of their savings will perhaps bring them out of their lair in 2022. On the corporate side, morale still seems to be steel because their coffers are crammed with profits . They raked in 44% more profit this year and expect to grow 7.8% again next year, revised upwards. They bought a record 245 billion dollars of their shares, or 2.6% of their capital which was added to the dividend, a sign that they have confidence in the future. The economy should not disappoint according to the latest forecasts of global growth of 4.3% after 5.6% this year. The Eurozone is in a good position with 4.3% and 4% for France.
For the first time, our valuation model of the US market shows a higher price target after the recent correction, due to very low long rates and remarkable profits, despite a P / E (price over profits) which appears at 21.1x the 2022 results against 14.4x for the Euro zone, but the difference is amply justified by the composition of the two indices. Again, it is almost impossible to find a risk-free investment that simply protects against inflation. As a result, equities remain an essential asset class over time and our other recommendation is to take advantage of the still very low rates to invest in residential, starting with your main residence.