After the big rebound of 2020 and a reasonably good growth in 2021, stock market investors will soon be looking forward to what 2022 has in store for them. Global growth, led by US and European nations, will be keenly watched by investors along with the impending hike in US interest rates in the new year. How the consumer-led demand shapes up and will the earnings growth remain robust in the quarters ahead will also be something that investors will be glued to. Another important factor for investors to watch for in 2022 will be the sectors leading the growth as also those sectors which investors need to be cautious about.
Recently, UBS has released a report ‘A Year of Discovery – Year Ahead 2022’, which takes a deep dive into the factors that may have a play in 2022. Excerpts:
“After two years marked by disruption, loss, lockdown, and reopening, we’re on the cusp of a Year of Discovery”, is what the report is all about. UBS expects a year of two halves. Elevated growth and inflation in the first half will create opportunities in cyclical markets, including the Eurozone. But with lower growth and inflation to come in the second half, UBS also sees healthcare, a relatively defensive sector, as well-positioned. Meanwhile, continued low rates, yields, and spreads mean investors will need to think differently to find yield.
Also Read – US IPO Watch: List of upcoming initial public offerings this week
UBS, in the report, says that it is likely past the peak in year-on-year GDP growth rates, but growth is likely to stay elevated, thanks to consumer spending, retailer restocking, and monetary and fiscal stimulus measures.
This should drive ongoing robust earnings growth: we are looking for 42% growth in global corporate earnings this year and 9% in 2022.
As far as sectors are concerned, UBS thinks this is a good environment for equities overall, and in particular for the energy and financials sectors, US mid-caps, and companies exposed to economic reopening. In contrast, we see limited upside for sectors like industrials, real estate, and consumer staples.
Energy, financials, US mid-caps, reopening winners
Against a strong, if slowing, growth backdrop UBS continues to prefer stocks, including such winners from global growth, as financials, commodity-linked equities.
Financials: The start of the 3Q US earnings season has supported our most preferred view on financials. Around a quarter of US financials have reported results with more than 85% beating expectations. The Fed’s moves toward tapering quantitative easing should drive higher longer-term yields (we forecast US 10-year yields at 1.8% by year-end), boosting net interest margins.
Energy: We see further upside for crude prices in the coming months, driven by OPEC+’s cautious approach to bringing back production and stronger jet fuel demand as economies re-open to vaccinated tourists.
US mid-caps: US mid-caps offer a balance between cyclical and quality exposure, which we think is attractive at this point in the cycle, as we transition between high growth and slower growth. Earnings growth is outpacing large-caps, and mid-caps are trading at the largest discount to large-caps in 15 years, around 20%.
In a portfolio context, mid-caps also offer some protection against the risk, bond yields rise faster than we expect – in recent months, the relative performance of mid-caps has been correlated with bond yields.
Reopening winners: We also see potential for recovery in select stocks exposed to economic reopening across the US. In the US, our list focuses on companies that should benefit from pent-up demand across leisure, energy, and financials.