By Giles Coghlan, Chief Currency Analyst at HYCM.
We are just days into the 2022, but undoubtedly, investors will be casting their eyes back over the previous year and mapping out their activities for the year ahead. With global economies reeling from the continued effects of COVID-19, central banks are now beginning to clamp down on rising inflation – and officials will inevitably be weighing these decisions up against the risks posed by omicron.
Nonetheless, as fiscal stimulus produced a rapid rebound in employment and various sectors of the economy re-opened in 2021 (such as the travel and hospitality industries), stock markets were propelled to record highs. You could say that 2021 was a year of extremes.
So, what trends and developments will be shaping the investment landscape in 2022?
Inflation & central banks taking action
It’s important to acknowledge that the coronavirus will remain a concern throughout 2022. Much is yet to be discovered about the omicron variant, and given its high transmissibility, Governments may implement new restrictions which could impact how central banks are able to move forward with their plans to hike interest rates and taper asset purchases.
The Bank of England (BoE) has already proceeded with its first hike, raising interest rates from 0.1% to 0.25% on 16 December, making it the first major central bank to do so. This came as a surprise, both to the markets and the economists who had predicted that the bank would hold off, given the current fears regarding omicron. However, inflation forecasts clearly concerned the Monetary Policy Committee (MPC), as figures are tipped to reach 6% for April. In any case, the pound rallied as much as 0.8% as a result of the rate hike, while U.K. 10-year yields jumped 5 basis points following the MPC’s decision.
So, what next? Many traders anticipate that the BoE’s base rate will rise to 1% by September, so this will be something to monitor closely. Other banks will more than likely follow suit throughout the year – the U.S. Federal Reserve have set a hawkish tone going into 2022, with three interest rate hikes already in the pipeline, as well as an accelerated tapering of its stimulus programme. As such, it would be wise to watch the value of local currencies, which tend to increase in value in line with interest rates. Value stocks may also provide sound investments.
Crypto: too big to ignore?
Interest in cryptocurrencies, and especially bitcoin, has skyrocketed over the past couple of years as a result of low interest rates and rising consumers savings. At the moment, the currency falls in line with its 2020 average of around $47,000 – but also worth noting is the fact that Bitcoin has also reached highs of $68,000 and lows of $29,000 in its short history. Clearly, a volatile investment, and individuals will need strong nerves to trade it, particularly in light of Bitcoin’s recent crash. But where is crypto headed in 2022?
Proposed legislation from the Biden administration, calling for greater regulation in the cryptocurrency market, as well as statements from U.S. Federal Reserve’s Chairman Powell about the currently lack of regulation, could sway the markets. Many central banks are actively exploring the prospect of central bank digital currencies (CBDC), which would undoubtedly impact how investors perceive cryptocurrencies, so individuals would be wise to keep tabs on these happenings.
Omicron and the rise and rise of tech stocks
2021 was all about rebuilding economies and the re-opening of various sectors, such as the hospitality and travel industries, which were unable to operate under stricter lockdown rules previously mandated. These industries enjoyed an initially sharp rise in output as a result of pent-up demand in 2021, but current fears regarding omicron may hinder this market recovery.
Current whisperings about the prospect of new restrictions may send investors back to tech stocks, which thrived under the most Draconian conditions in 2020, as people looked to platforms like Zoom to keep in touch with loved ones. Even during the best of times, tech stocks have the potential to outperform, given their high profitability and strong, sustainable cashflows. However, the prospect of the Fed hiking interest rates may be enough to limit tech stocks which have already enjoyed a stellar run. In the wake of recent COP26 talks, investors would even be wise to look to green tech stocks – electric car manufacturer Tesla (TSLA), for example, soared to an impressive $1.1tn valuation throughout 2021.
While 2022 may be trickier to predict than the last year, investors would be wise to watch these events closely, in addition to vaccine trends and potential supply chain easing, which may help the markets find their footing. HYCM clients can take advantage of investment opportunities by trading variety of instruments in forex, indices, commodities, and stocks.