11 January 2022

According to the Chinese zodiac, 2022 is the Year of the Tiger. Tigers are bold, powerful and dangerous, but in Chinese astrology they are also impulsive, short-tempered, and have difficulty getting on with others. There is an old Chinese saying about “sitting on the mountain, watching the tigers fight”, which means that, when the situation is violent and confusing, it’s best to stand back and see how things work out.

There are a lot of tigers around this year:

  • COVID-19 is not letting the world “go back to normal” any time soon.
  • The US share market has enjoyed three years of spectacular returns, but 2022 will break the winning streak, as inflation persists, wages rise, profit margins fall, and earnings growth slows.
  • The loss of a single Democratic Senate seat would push the US Congress back into legislative gridlock.
  • The US Federal Reserve and other central banks will lift interest rates. In 2021 the Fed misunderstood inflation, and in 2022 it is likely to mishandle interest rate rises. Either it will raise rates by too little too late (and let inflation rip), or by too much too soon (and trigger a recession).
  • Supply chain problems will diminish, but some shortages will persist in key industries such as computer chips until 2023.
  • Asian demand for fossil fuels has already boosted the prices of oil, gas and coal. Global economic recovery will increase the demand for energy, pushing prices even higher.
  • China’s 2022 GDP growth will fall short of investors’ optimistic forecasts, because the leadership is trying to accomplish three incompatible tasks at the same time – controlling COVID-19, mining more coal to prevent a power crisis, and reviving the residential property market.
  • US Democrats and Republicans have their differences, but not one of them wants to be seen as a panda hugger. 2022 will bring more restrictions on technology transfers to China, more support of Taiwan, more complaints about Chinese human rights abuses, and more sanctions on individual Chinese companies – not quite a cold war yet, but a bit further into the icebox.
  • No shortage of geopolitical flashpoints this year: e.g. Ukraine, Iran, Turkey, Taiwan, the South China Sea, Yemen, Myanmar, Ethiopia.

The outlook for the Australian share market is better than for most of the world. Inflation is low, wage pressures are minimal, and the Federal election due by end-May is unlikely to produce major policy changes. As investors focus on fundamentals, stocks with solid earnings will come back into favour, and speculative stocks will lose popularity. For the big four banks, 2021 was the year of recovery: 2022 will be much harder, and the big banks are likely to underperform.

 

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