Outlook 2022: Key market themes
January 13 2022 - Team Stockal
The year 2022 might witness post-pandemic recovery as inflation is likely to subside, infection rates drop and the markets are well prepared for a Fed tapering. Against this backdrop, U.S. Equities are likely to perform well with value outperforming growth in a rising interest rate environment during the year. In continuation of our recent economic outlook 2022 report, we would like to look at some of the sectors and themes which would be positive for 2022.
Growth opportunities for investors in 2022
As we have already discussed in our previous report, it is clear that we are entering a rising interest rate and higher inflation environment. Banking & Financials Sector, and Energy & Automotive segments usually perform well when the market expects higher inflation which is going to be the case in the next few months of the year. (Chart below). Additionally, analysts maintain a strong buy recommendation on Banks and Energy stocks for 2022.
Sensitivity of Industry groups in a higher inflationary environment
Source: Visual Capitalist.com, December 2021
Sectors with highest correlation to Bond yields
When we look at sectors with the highest correlation with bond yields over the last 5 years, it is not surprising to see sectors such as Financials and Energy, outperforming the markets as they have the highest correlation to yields. This trend may likely continue if yields continue to remain higher in 2022.
S&P 500 sector correlation to bond yields
Source: Bloomberg.com, January 2022
Banks to remain the biggest catalysts in a rising interest rate environment
Banks are the best investment bets to make when economies rebound and consumer spending improves while the unemployment numbers are low. Apart from the large banks like Bank of America (BAC), Citigroup (C), Well Fargo (WFC), JPMorgan Chase (JPM), and Goldman Sachs (GS), regional banks are set to benefit the most from this environment. U.S. regional banks are poised for top-line growth as loan growth is expected to pick up in 2022. Lending is set to rebound as the challenges set by low commercial-line utilization and Paycheck Protection Program runoff eases and improved strength in consumers continue. The bank’s net interest margins are likely to improve as the Fed’s rate hikes are expected in the second-half of the year. The KBW Bank Index (BKX) is up about 34% over the year versus 22% for the S&P 500 index (GSPC) for the same period.
Some of the regional bank ETFs include:
- SPDR S&P Regional Banking ETF (Ticker: KRE)
- iShares U.S. Regional Banks ETF (Ticker: IAT)
- Direxion Daily Regional Banks 3X Shares (Ticker: DPST)
The financial sector ETFs which track the index include:
- SPDR Financial Select Sector ETF (Ticker: XLF)
- Invesco KBW Bank ETF (Ticker: KBWB)
Rising oil prices to benefit the Energy sector
As the economies reopen, the oil and natural gas prices are heading northward with the WTI futures prices touching $80 per barrel lately. It is a great time for investors to take a look at Energy stocks and ETFs. Energy being the biggest gainers from 2021 is likely to continue this trend in 2022. As we had covered in our previous report in November , the outlook for the Energy sector is to remain positive in the near term as traders are betting that the crude oil prices are likely to touch $100 per barrel which is positive for energy stocks. Some of the direct beneficiaries in this space include large players like Exxon Mobil Corp (XOM), Chevron Corp (CVX), Devon Energy (DVN), Marathon Oil (MRO), Royal Dutch Shell (RDS), Total Energies (TTE), ConocoPhillips (COP), BP PLC (BP), and Equinor ASA (EQNR).
The S&P 500 Energy ETF or the XLE has generated around 55% returns over the year, however many of the clean energy stocks are classified into other sectors hence sometimes this may not be a perfect benchmark. Some of the ETFs in this space which investors may look at include:
- First Trust Natural Gas ETF (Ticker: FCG)
- iShares Global Clean Energy ETF (Ticker: ICLN)
- iShares U.S. Energy ETF (Ticker: IYE)
Infrastructure spending to boost growth in value rotation
The infrastructure spending bill passed and signed into law in 2021 by President Biden’s administration saw investment opportunities in Communication Services, Industrials, Materials and Utilities sectors. These value-oriented, cyclical sectors are likely to gain momentum heading into 2022. Some of the direct beneficiaries in this space include Brookfield Infrastructure (BIP), Enbridge (ENB), and Crown Castle International (CCI). However, it is advisable for investors to look at some of the ETFs which are exposed to several other infra plays and have access to a greater number of companies through investing in ETFs. Some of the ETFs in this space include
- iShares Global Infrastructure ETF (Ticker: IGF)
- Global X U.S. Infrastructure Development ETF (Ticker: PAVE)
- FlexShares STOXX Global Broad Infrastructure Index Fund (Ticker: NFRA)
Technological innovations remain critical for growth
As people around the world continue to live in the pandemic environment, technology and digital life is likely to take centre stage to assist with this societal transformation. Revolutionary technologies such as artificial intelligence, robotics, cloud, block chain, fintech, social media, cybersecurity, e-commerce and also 5G will be paramount to growth in 2022.
Investors can look for potential growth opportunities in this space by investing in our
- Global X Equity Sector stack (GLOBALXEQT) and Global X Disruptors Stack which extends into key themes within the portfolio such as Cloud, E-commerce, Cybersecurity and Fintech
- Artificial intelligence stack (OMNIAIT) which gives investors exposure to growing themes in the disruptive technology infrastructure like cloud, 5G, Big data, robotics, etc.
- The Innovation Stack (GLOBIN) invests in themes such as Cloud, Robotics, Cyber Security, Space Exploration, AI & Automation, Biotech and Alternative Energy and Energy Storage.
Key players in the rise of:
- Robotics and artificial intelligence: Intuitive Surgical (ISRG), C3 AI (AI), TuSimple Holdings (TSP)
- Digital growth: Coinbase Global (Coin), Shopify (SHOP), SentinelOne (S)
Digital Economy Ecosystem
Source: Global X Outlook 2022, December 2021
Pandemic proved that Healthcare solutions need innovations from Biotech companies
The COVID-19 pandemic was a reminder that innovative healthcare solutions from biotech firms was the need of the hour. The Biotech sector presents opportunities for investors in 2022 as the pandemic created huge opportunities for these companies that are involved in developing treatments and vaccines for the virus. Investors can look at our Healthcare Stack (HEALTHLEAD) which is a curated portfolio of top performing U.S. pharma and Biotech companies.
Some of the key players in this space include Novavax (NVAX), Regeneron Pharmaceuticals (REGN), Vertex Pharmaceuticals (VRTX), and Exelixis (EXEL).
Investors can benefit from these trending themes in 2022 by investing in our curated portfolios called Stacks which are being put together by experienced global portfolio managers and hedge fund managers with consistently higher CAGR generated from these stacks.
- Omni Supreme US stack (OMNIUSS) is a portfolio of stocks with innovative companies from IoT, Sport & Wellness and Consumption to name a few which are all going to see a comeback in 2022 due to pent-up demand and highest savings among the U.S. households during the pandemic.
- The Electric Vehicles Stack (AUTOEV) is the best way to have a percentage of investments allocated to cyclical sectors which will benefit from the economic reopening. This stack allows investors to own stocks in EV technology, Autonomous vehicles, EV battery operators and clean tech companies.
- The Value Stack (VALUE) allows investors to look at undervalued companies with low book value and strong future growth potential.
- ESG focused Stack (ESGLEADER) is the perfect portfolio for investors to gain from the firms that show superior environmental, social and corporate governance (ESG) qualities. We have seen strong returns generated from the ESG focused funds and ETFs in 2021 and this trend is likely to continue into 2022.
And lastly do not ignore the potential of Dividend-paying stocks
Dogs of the Dow 2022
A strategy that is popular over the years during uncertain times is to invest in stocks that pay better dividends and are usually safe and less volatile. This is a popular investing strategy which tells investors to buy the top ten stocks from the Dow Jones Industrial Average (DJI) with the highest dividend yield at the end of each calendar year.
Here is the list of 2022’s Dogs of the Dow based on a screen run after market closing on December 31, 2021. Verizon (VZ), Dow (DOW) and IBM (IBM) top the list with dividend yields of 4.9% each and on an average every company on the list has either maintained or increased their dividend payouts over the last three years. (Graph below)
Top Ten Dividend yield stocks for 2022
Source: Bespoke.com, December 2021
Inflation and the Pandemic remain the biggest risk factors to investors in 2022
The biggest risks for markets in 2022 are inflation, the COVID-19 pandemic and the geopolitical tensions according to a Markets Live Global Survey with over 700 respondents. More than 30% cited that the current inflation numbers and its impact on the markets were their biggest worries in 2022.
Market risks for 2022
Source: Bloomberg.com, December 2021
S&P 500 year-end targets for 2022
The chart below lists out the year-end targets for S&P 500 by several banks and financial firms for 2022. We are currently at 4,677 on the index and some of the large investment banks maintain a cautious view on the potential upside from the current levels.
Although 2022 is set for another strong economic growth for the U.S. economy, the higher costs in a rising interest rate environment means profit margins on corporations are likely to be squeezed. On the investment side, 2022 will remain a year of more cautiously optimistic outlook with selective cyclical sectors, stocks outperforming the markets and stock picking with more focus towards strong fundamentals and valuations. As most analysts predict the green back is going to gain strength in the current year and U.S. equities are set to outperform other major emerging markets once again in 2022.