Fri. Jan 21st, 2022


Can the bull markets continue in 2022? We had a big run in the US on the back of billions of new electronic dollars and big fiscal boost. The S&P 500 index rose by about 30 percent in 2021. Monetary expansion will now decline.

European and some Asian markets tried to keep pace and rose in response to economic recovery, only to end up in Covid-19 problems again. China did badly as it continued its shift to a more Marxist approach, attacking entrepreneurs and property owners in an anti-free enterprise attitude with Chinese characteristics. The Hang Seng Hong Kong index was down 15 percent from 2021.

The fund returned 7.75 percent for the year on its risk-controlled mix of bonds and equities. Equity investments have benefited from the emphasis on the US and global recovery. The specialist world indices capturing the green themes performed only moderately well after their spectacular 2020. The position was reduced and some gains were taken.

The investment in global indices in the digital sector has mainly yielded good returns, but has outperformed the technology-focused Nasdaq’s larger shares. The bond portfolio was in a mix of index-linked government bonds and cash. This protected it from the forecasts of rising inflation and the onset of interest rate hikes around the world which suppressed many conventional effects.

2022 experiences a difficult birth. The Covid blood still hangs over us. So far Omicron proved a less lethal variant, although it spread rapidly. We expect the world to become accustomed to living with the virus next year, as vaccines, better treatments and a build-up of immunities diminish its more dangerous forces. The year should see some progressive relaxation of the current constraints in many places.

The inflationary effects of the past two years of excessive borrowing and pressure from governments and central banks are catching up with us, and must continue before peaking next spring.

US President Joe Biden struggles low poll ratings and finds it difficult to get his flagship spending and tax measures through his own party in the Senate. The new German government enthusiastically endorses the EU’s desire to travel faster to net zero, with detrimental consequences for traditional EU carmakers, electricity generators, fossil fuel producers and the rest. Many central banks will gently raise interest rates as they nervously move away from earlier confident assurances that inflation would be limited and short-lived. Money printing will end in the US and the UK and continue more cautiously in the eurozone.

The advanced world needs to adapt to the new China, one that is more autocratic and nationalistic as it asserts itself more and expands its sphere of influence through Asia and the Middle East.

This year is likely to see continued Cold War-type tensions between the US and its allies on the one hand and Russia and China, the West’s disruptors, on the other.

Energy price rises was brought about in part by Russia’s manipulation of gas supply to Europe, while European supply chains experienced problems with goods deliveries from China.

Meanwhile, our two years-long themes of the digital and the green revolutions will still take up a lot of investment time. In Europe, 2022 will start with governments struggling to curb the rise in energy prices, which will hurt real revenues and output. Periods of low winds and accelerated closures of older fossil fuel and nuclear power stations make life more difficult. Gas will be used more as a transition fuel to dampen the impact a bit.

I assume for the portfolio that Russia will provoke the west, but will not bring about a frontal invasion of Ukraine with the risk of war with NATO troops.

I assume that China will continue to consolidate control over Hong Kong, its western provinces and Tibet, but will not launch an invasion of Taiwan, recognizing that the US still offers a lot of support to the island. There could very well be further cyberattacks along with official denial of state involvement.

There may be infiltrations of Russian troops to help forces that are friendly to them in countries as close to the UK as Ukraine and Belarus.

There will be a clear refusal to follow Western standards in the pursuit of net zero or corporate governance or human rights by China, Russia and several emerging market countries. Investors who have a stronger interest in the environmental, managerial and social issues surrounding their investments will need to think about how it can be combined with investing in the Chinese and Russian spheres of economic activity.

I took the FT fund out of Chinese ETFs in 2020 as the authoritarian trends in Beijing grow. The transition to Taiwan with its democratic system has so far worked well as an investment idea with much better performance.

The world will split over the net zero climate goal. India and other leading emerging countries will be in line with China to refuse to reduce their emissions any time soon, on the grounds that they need cheaper fossil fuels and their reliable technology to accelerate their growth.

Within the Western grouping, there may be more tension over how seriously countries take net zero. Richer European countries will be the leading force in speeding up transition. The US under Biden will provide a lot of rhetorical support, but will increasingly rely on fossil energy from its own resources to steal a competitive march. The president has issued new permits to explore and drill oil and gas.

Most of the rest of the world will pay homage to the concept of net zero, delay its implementation and demand more concessions from the west to help. China will continue to specialize in supplying green products to the west, made by its fossil fuel dependent industries, while expanding its own extensive use of coal.

This will make 2022 a more difficult year for investors. With less monetary and fiscal support, high initial valuations and with a lot of uncertainty about policy, the virus and the disruption that is going to come from China and Russia, my base business assumes low positive returns for the year of the current portfolio.

I would beware of too much inflation, too much policy tightening or too much international tension, as any of these could turn us into a bear market. If one of these bad scenarios arises, it will be necessary to further reduce risks in the portfolio by keeping more cash and low-risk effects to the extent that the fund rules allow.

More problems due to the virus are likely to delay a tough policy response that will hurt markets. It will also benefit digital businesses over companies that depend on social contact, both in work and leisure, and thus support digital-driven groups. Recovery investments in areas such as travel, hospitality and other personal services will require better news about the virus.

Sir John Redwood is global chief strategist for Charles Stanley. The FT Fund is a sham portfolio designed to demonstrate how investors can use a wide range of ETFs to gain exposure to global equity markets while keeping investment costs low. john.redwood@ft.com



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