9 bold predictions for 2022
When it comes to predictions, there are two types of articles that you'll find. The first type is where people put their minds to what might lie ahead, assess the prevailing conditions, and make a call on what they think will happen. They do so often against their will and with full knowledge that there is an even chance they'll get it wrong. But it is a bit of fun, and it gets the grey matter going.
The other type of article lectures us about how the evidence shows that making predictions is a mug's game. Today, we're going to assume you've read one of these lectures and move on to the fun stuff, thanks to the nine fundies who have given us their bold predictions for 2022.
Interest rates and inflation dominate the views of our guests and remain significant points of disagreement. They've also got their eyes on deflating bubbles in speculative investments, there's a contrarian view on why markets have years of clear skies ahead, and someone reckons the Wallabies will win the Bledisloe Cup!
Scroll down to read or watch the full interviews where our fundies go out on a limb with their bold predictions for the year to come.
Note: This vision was shot on the 6th and 7th of December 2021.
#1 The 60/40 portfolio isn't working like it used to
Expert: Anthony Aboud, Perpetual Asset Management
I think we might see the end of the 60/40 portfolio. And what I mean by that is a lot of portfolios are set up 60% equities, 40% bonds, and has been a hedge historically against each other. But if we see an environment where inflation takes off and interest rates go up, bonds sell-off. And whereas equities have historically offered an inflation hedge, we don't think that that the index as a whole will offer that inflation hedge because the last four decades, companies which benefit from deflation are a bigger part of the index.
With so much money going in passive, we don't believe the whole index offers an inflation protection.
So we feel that the 60/40 portfolio may not offer the hedge that it historically has.
#2 Beware of stagflation
Expert: Eleanor Swanson, Firetrail Investments
I think something that we are really watching out for at the moment is stagflation. And the reason we're watching out for that is because this new variant that's come out, Omicron, potentially we're going to see more new variants next year. And it just means that potentially the recovery that we're looking for in supply chains might not happen as quickly as the market's expecting. And that would be a pretty negative scenario for markets, if the central banks would be forced to raise interest rates, we believe, in that scenario. They are monitoring inflation as their key metric to respond to. So that's something I guess we're watching out for in 2022.
#3 Five years of smooth sailing ahead
Expert: Simon Shields, Monash Investors
It's not very popular to say this, but I think everything's going to be okay. We had the crash in 2020. It was a short, sharp crash, but crashes don't happen every year on average. I think they happen about every seven years historically. And okay, sometimes you get really, really big ones like a GFC and it takes a bit longer to play out. But I reckon we've got at least five years of clean sailing ahead of us.
#4 The crypto bubble will burst
Expert: Steve Johnson, Forager Funds
As a caveat, I hate making predictions because I don't want to think about one particular scenario, but I think this whole meme and crypto bubble is going to come to a spectacular bust in 2022.
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It's already underway, so I'm not being Nostradamus here, but it's been a really crazy bubble. And I think it's of a magnitude that we're only going to realise when we look back on the market caps of some of these things that don't have revenue and don't have profits and people are going to really wonder what the hell they were thinking buying some of these things.
#5 It's going to be a bumpy ride in 2022
Expert: David Moberley, Paradice Investment Management
2022 is going to be very different to '21. So it's probably going to be characterised with a lot more volatility, firstly, and secondly, it's hard to be too bullish, to be honest. So I know a lot of people fully invested. You look at positioning indicators across the market, they look quite full. But if you just think about the market quite simply and say, it's like a stock and there's two things that can move it, either earnings or a multiple. If you look at earnings, it looks like the upgrade cycle's peaked.
The second thing on the multiple is if you listen to central banks globally, it sounds like we've seen the lows in terms of the interest rate cycle and an upward pressure on those over time is likely to lower multiples, not increase them. So it's very hard to be bullish next year.
Real yields are still quite negative. So at the moment, equities are still the only game in town, but that's changing and evolving. So I think it's going to be quite volatile next year.
#6 Sustained inflation of 4-6%
Expert: Hamish Carlisle, Merlon Capital Partners
Look, 2022 is going to be one of the most interesting years for a long time. So I think we wouldn't be surprised to see 20 to 30% sort of cumulative inflation over the next two or three years. And I think that process has already started and could continue to play out through next year. So inflation in that sort of 4 to 6% level for a longer period than probably certainly the bond market expects.
I think some of the long duration growth names that have performed very, very well over the last year, whether that's tech or, in our market, names like CSL and the like will struggle and it'll go back to some more sort of old fashioned established, boring businesses, probably doing better. And certain commodities doing better. I think iron/ore's already quite full, but certainly we're quite bullish about energy prices and non-steel related commodities.
#7 Rates lower for longer
Expert: Chris Demasi, Montaka Global Investments
I would say that structurally we've got to remember that interest rates have been declining for almost 300 years. And there's three big structural drivers that are going to mean that interest rates stay lower for longer.
We've got populations that are ageing, we've got the use of technology that's intensifying and that boosts productivity, and then on top of that, we've got very, very high loads of debt around in the world. And all three of those things say interest rates are going to be lower for longer.
And in any case, equities are the best place to park your money, compared to bonds, compared to real estate, compared to almost any other asset classes, equities are providing the best returns. And so I think it's very dangerous prediction to think interest rates are good going to unsettle and crash equities. And it's much more dangerous to be sitting on the sidelines from equities.
#8 Plenty of room for bonds to crash the equity party
Expert: Bob Desmond, Claremont Global
I do think it is a time to be cautious, but I'm generally pretty cautious. I wouldn't be banking on it getting bigger and better next year. If you look at the tips break even right in the bond market... So let's assume it's right. TIPS break even over 10 years says inflation's going to be somewhere around about 2.5%.
So let's say even if we got the bond rate back to not even just a fair, not even a real rate of interest, the bond rate would be 2.5%. We're 1.3 today. So that would be quite a shock for markets.
If we got back to long term norms, above say 1% real, interest rates would be 3.5. Now I don't think that's going to happen, but it does show you that there is a lot of room for interest rates to back up from where they are now.
#9 Inflation not as bad, interest rates lower
Expert: Matthew Kidman, Centennial Asset Management
The prediction that everyone's got... Everyone's obsessed by inflation at the moment. And my kind of feeling is inflation, that bump and inflation that we've had, has already peaked. Oil is coming down. And I think the problems with the supply chain that have impacted everywhere around the world, once we get through the Christmas shopping period, it's a chance of correcting. And I think with that, prices might ease. Because with inflation, you've got to keep prices going up every year.
Now, the caveat to that is about wages. Will wages in the US actually grow at a quicker rate? It doesn't matter if they grow a little bit more. In fact, that's good for the economy, but I think the idea that we're going into an inflationary cycle is probably wrong. I think there's a little bit around, which is good. That means interest rates mightn't go as high as what the market thinks is good for the market. But I think that's my bold prediction. Inflation not as bad, interest rates lower.
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