Although macroeconomic events have dominated financial markets during the pandemic, earnings and fundamentals still matter, said Tim Murray, capital market strategist, multi-asset division at T Rowe Price.
Meanwhile, as inflation hit record high across the globe, Murray believes while easing supply bottlenecks could mitigate inflationary pressures, durable increases in housing costs and wages could mean higher inflation for longer.
Here are the top ten market themes which investors should pay attention to identified by Murray:
1. Earnings matter.
Despite fading monetary and fiscal stimulus policies and slowing down of economic growth, stock markets should continue to notch record highs boosted by strong earnings growth.
2. Fed hikes expected to be limited.
Although central banks announced recently that they will start tapering asset purchases this year with raising interest rates, aggressive tightening could upend the economy. The futures market even expects the Federal Reserve to pause or even reverse course well before reaching its targeted hiking projection of above 2%. However, if the economy is still strong and inflation remains untamed by the end of 2022, these expectations may need to be reassessed.
3. Chinese regulatory policy is a big deal.
2021 has been a tough year for tech giants in China as the government imposed measures to put the sector “in line” with national policies such as common prosperity and anti-trust initiatives. Going into 2022, he believes Chinese regulatory policy will continue to be a key factor.
4. Is elevated inflation structural?
The spike in inflation last year has mostly been driven by Covid-related shocks given the faster recovery in demand than supply. While this mismatch could ease considerably in the next few years, the tight housing and labour markets are likely to result in higher sustained inflation.
5. Growth versus value.
The valuation gap between growth and value shares has widened over the past two years to levels only exceeded during the tech bubble. However, while solid fundamentals and secular tailwinds will underpin higher growth stock valuations, the potential upside for growth stocks appears more limited in 2022.
6. Investors are clamouring for alternatives.
Investors are also increasingly seeking alternatives to stocks and bonds given extended stock valuations and low bond yields. This leads to an increase in inflows in previously obscure segments, such as special purpose acquisition companies and cryptocurrency.
7. US politics: all sound but no fury.
The market expected regulations on infrastructure, tax reform, carbon emissions, and big tech to impact financial markets after US President Joe Biden’s Democratic Party won control over both Senate and Congress. However, progress on these initiatives has been uneventful, and new potential regulation is likely to be heavily watered down relative to original expectations.
8. Stock selection is important.
Since the pandemic, macro factors have often overshadowed company-specific fundamentals. However, stock selection is beginning to matter again.
9. Credit market fundamentals are supportive.
Despite offering modest yields, the fundamentals of the credit sector look remarkably strong. While tight spreads are typically a headwind for US high yield sectors, leverage, margins, and interest coverage ratios all look healthy.
10. US dollar strength.
Contrary to many investors’ expectations, the dollar was strong in 2021 as US economic growth outpaced other developed markets. The dollar is likely to strengthen further this year as the Fed shifts to a tightening bias while other major central banks remain firmly on hold.
