2022 outlook: High hopes fuel our top picks
We have a glass half-full mentality here at Minerva Analysis, and we are generally optimistic about the state of the global economy as we head into 2022. We are also realistic and understand that most long-term predictions for the year ahead are often out of date within days. You are also bombarded with 2022 outlooks, so, to keep things easy, we have decided to boil down our thoughts for 2022, and only include those ideas that are actionable and will help your trading. You may notice that we have left out some sectors, regions, markets and entire currencies. This is because we only wanted to give you quality ideas, and not our view on every single asset class when many other outlets are bombarding you with information. Instead, we have chosen ideas that we think are worth spending the time to read.
2021 was a strange year, with some mixed performances and the toppling of some big-name growth stocks. In fact, as we end 2021, there are a large number of growth stocks, particularly in the US, that have already entered correction territory. As you will see, we are not as hot on those stocks in 2022, at least not for the first quarter. There were some big rotations in market leaders this year, which is a sign that traders need to be well-diversified as we move into 2022. As we progress through December, the market became very jittery as another Covid variant was identified. Volatility was triggered by the confluence of Omicron, tighter monetary policy and thin liquidity as we moved towards the Christmas holiday. However, the negativity that pervaded the market gave us pause for thought – is now the time to start buying?
If, like us, you can’t wait to start trading again in 2022, then we hope that our ideas pique your interest and inform your trading decisions in the new year.
Overall, we wish you luck and prosperity for the trading year ahead.
Fundamental focus for 2022:
Oil prices are creeping higher and European wholesale energy prices remain close to records as we move to the end of the year, which makes make many people worried about the outlook for inflation. We think that this is something to keep an eye on, however, energy prices can be seasonal, thus we could see some energy prices start to fall back as we move forward in Q1. Added to this, the latest US Conference Board Consumer Confidence update for December saw inflation expectations fall back from the month prior. While we will need to see more data to confirm if this is a trend, lower inflation expectations could be a sign that prices may have peaked as we move to 2022. Why does this matter? If inflation does ease off in the first few months’ of 2022, as we expect, then it could make it easier to determine monetary policy, particularly in the US. While the Bank of England has already hiked interest rates, there has been some uncertainty as to the timing of the first rate hike from the Federal Reserve. If, and it’s a big if, the Conference Board Consumer Sentiment inflation expectations component is a sign that the pace of inflation will start to fall in the coming months, then it makes a rate hike in mid-2022 from the Fed more likely, and it reduces the chance of a hike earlier in the year. This could reduce Fed rate hike anxiety as we move into 2022. It may stabilise bond yields and it may also dampen volatility which could make for a good environment for stocks to rally at the start of the year. However, as you will see, we are extremely picky about what stocks we are choosing to trade in 2022.
Stock picks for 2022:
We are loathed to put a number on where we think the S&P 500 will end up at the end of 2022, as so much could change between now and then. Instead, we prefer to look at individual stocks that may benefit in the financial and political environment that we predict for next year. Overall, we like stocks that have stable earnings, a fair price and equities that we believe can ride out Federal Reserve rate hikes and inflation. Below, are our top sector and stock picks for 2022:
- Food producers: Pepsi Co, McDonalds, Coca-Cola and Mondelez, may not be the health-food picks of 2022, but we think that they have the power to withstand tighter US monetary policy. Mondelez, the packaged foods firm, is on our watchlist because it has pricing power. It has already said that it will raise prices in 2022, and this is unlikely to hit demand. Thus, this is our top pick in this sector for 2022. McDonalds, Pepsi Co and Coca Cola all have stable earnings, decent balance sheets and the potential to do well if you want to hold them for the longer term. Think of them like well-known defensive stocks that can weather the financial environment if things get a bit rough out there. This may not be fine dining, but these stocks have the potential for decent returns.
- Travel and tourism bounce back 2021 was another difficult year for the travel and tourism sector, and with the discovery of the new Omicron variant, 2022 could be another challenging year. TUI, the package holiday specialist, has already said that travellers are holding back from making plans in the current environment. New covid restrictions in the UK and across Europe are unlikely to help the travel industry, and we expect more pain for the airlines. Due to their rate of cash burn in the last 2 years, we expect a wave of mergers, or government bailouts to prop 'national' carriers up if tourism is forced to slow due to the spread of Omicron. However, there are some bright spots, for example, once booster shots have reached a decent level, then cruises could be back on. While cruises were Covid hot spots in 2020, in 2022 they could become the most covid-friendly holiday out there, with cruise operators only allowing vaccinated tourists on board. This could make cruising in a covid-friendly bubble the newest holiday trend. It could also give cruise operators like Carnival and Royal Caribbean Cruises, which are trading down approx. 30% since peaking in June and November respectively, a boost once the worst of the Omicron wave is behind us.
- Electric vehicles: Although Tesla has started to recover as we get close to the Christmas holiday, we are less interested in this company and prefer the broader electric vehicle space as we think that there is more value to be had there. We are also fans of charge point makers as more EV infrastructure is going to be necessary year on year. This includes Shell and BP, but also Hyundai, who are some of the largest charge point makers in the world. With countries across the world pursuing green agendas, better EV infrastructure and more political pressure and incentives to buy an electric vehicle, we continue to like the EV play next year. However, we are put off by Tesla because of its valuation. While Tesla is likely to remain the market leader and gold standard in EV, we prefer other EV makers, including VW and Ford, along with Rivian, who are set to see their slices of the EV pie rise in the coming years. EV sales are set to make up 5% of global auto sales in 2022, up from 3% this year, and we think that this number could be higher for 2022 if the global chip shortage recovers.
- Healthcare: This is another area that we like for 2022, we think that the pandemic has highlighted the need for more spending and innovation in the clinical healthcare space. From tools that allow a quicker diagnosis, to super sensitive blood tests that can pick up the very earliest signs of diseases like cancer, the race is on to push forward developments in the healthcare space. Even though the pandemic continues to rage with the new Omicron variant, we still think that the focus will be on catch-up treatments and operations, particularly in the West, but also in China and India. This could lead to a surge in worldwide healthcare spending, that some estimate could increase by 5% in dollar terms. Added to this, changes to Medicaid in the US means that a potential 7 million more Americans could qualify for expanded medical coverage, which is big news for US pharma companies. Overall, the health care sector could benefit from a global focus on health and demand for novel treatments and early diagnostic tools. It may also benefit from being a defensive sector as the world tries to fight this latest wave of Covid in early 2022. Our top picks in the health care space include US pharmacy chain CVS and pharma giant Pfizer. The healthcare sector is in a multi-year power cycle, in our view, and we like CVS, not only because of its huge network of drug stores across the US, but because of its focus on healthcare services in 2022 and beyond. Pfizer is obviously dominating in the Covid space and it could earn $40bn from its Covid franchise next year, as booster vaccines and anti-viral drugs become the chief way to treat and prevent Covid. What’s not to like?
- The Contrarian call – Amazon The vast majority of analysts love Apple, and we can understand why, but it will be hard for day traders to benefit from trading Apple next year, outside from corporate earnings releases. We think that Amazon has more potential and could bounce back next year if it shifts its strategic focus and if its new leadership manage to put more focus on its services businesses. As long as Amazon can stay above its December 15th low around $3310, we are positive on this stock. A lot of bad news is also ready baked into the price. In 2022, we expect the focus to shift to its other services, including cloud computing, aside from its main e-commerce business and this should help to lift the stock price.
- Online retailers We continue to think that online retail sales will grow, even if the opening up of economies in 2021 meant that more consumers went to bricks and mortar retailers. Online sales continue to cross national borders, for example, even Brexit isn't slowing down British demand for foreign goods. European retailers have not been as quick to adapt to online sales as US and Asian counterparts and there could be an opportunity for investors for two reasons. Firstly, we expect big growth for some of the newest entrants, for example Turkey’s Getir, the super-fast grocery delivery company. Secondly, American private equity firms are awash with cash, and could look to buy up European companies with the potential to boost their online presence. Grocers and large brands, particularly in France and Germany could be in focus.
- Regulation and Technology Surely 2022 is when governments around the world start to regulate the internet and social media? 2021 saw a Facebook whistle-blower try to take on the tech giant single-handed, but now it is time for the global political system to take over. While it makes sense to have some sort of global regulation for the internet, this is unlikely. Instead, we think that 2022 could be the year when US regulators take on the tech giants in a way they have not done so far. It won't just be about telling them to make relatively small divestments, instead it could be about limiting their future activities and making them comply to codes and standards of practice. Thus, as we progress through this decade, social media companies could become like banks after the financial crisis: facing a tougher political environment with more constraints on their behaviour. Since Facebook is by far the biggest player in this space its share price could take the brunt of any move by regulators to limit their reach. US regulators may be particularly motivated to take action in a mid-term year when members of the US Congress may pursue certain policy areas to boost their own PR and target big tech.
Germany: Dax over the euro
Germany under new leadership: after 16 years, Merkel has left office and Olaf Scholz, the social democrat has taken charge. This could herald in not just a change in leader, but also a huge shift politically in Germany. We expect Scholz and his coalition partners to herald in an era of Big government in Germany and increase government spending. The Green party, in particular, have ambitions to set a new green agenda for Germany and this requires huge investment. Also, a three-way coalition, in contrast to Merkel's recent 2-way coalitions, could lead to political incoherence and political paralysis, which will not be good news for Germany in the long run. Scholz has three main issues to deal with when he takes office: 1, covid, 2, how to balance Germany's books after the country ran up EUR 400bn in debt during the pandemic and 3, how to deal with geopolitical foes including Russia and China. If Russia manages to take advantage of a discordant political troika in Germany, then it could be bad news for the euro in 2022.
The change at the top of Germany’s politics may lead to more emphasis on fiscal expansion, especially if the greens get their energy agenda passed. This is good news for the Dax and the German car makers, in particular, but it may not be such good news for the euro. There is also a change at the head of the Bundesbank. Although Nagel is considered a conservative and the market is expecting continuity from the Bundesbank, we think that he is more pragmatic and potentially more dovish than Weidmann was and this could be a shock to the market in 2022. Because he is an insider, he could act as bridge between the ECB and the German people, and he could also persuade people at the Bundesbank to pursue a more pragmatic relationship with the ECB instead of constantly being the hawkish outsider. In 2022 there could be less pressure from Germany to tighten monetary policy at the ECB, which could weigh on the euro, with a break below the recent range, just below the $1.12 level and then a move lower to $1.10 possible in EUR/USD at the start of 2022, as sovereign yield spreads also widen vs the US. We believe that the dollar uptrend could last for a while yet, as the dollar tends to move a multi-year cycles, the euro may have further to fall, even if the pace of losses slow in 2022 compared with this year. A weaker euro is also good news for the Dax.
That’s all folks, you have reached the end of the report, and we hope that it made for good reading. Happy New Year to all of our readers!