man looking in binoculars during sunset

2021 is coming to a close. What a crazy year it’s been in the stock market. Come to think of it, seems like almost every year is crazy these days.

We hit peak euphoria in the SPAC, pandemic and China tech plays earlier in the year. Since then, investors caught in the hype have been nursing their wounds.

If you didn’t clean up your portfolio then, you might have taken more hits recently after a slow burn throughout the year. However, if you had taken inflation cues seriously, you might’ve avoided most of the pain the past month.

SPDR sector tracker shows that utilities, consumer staples, real estate and healthcare have outperformed in the past month. Although energy is down the past month, it’s actually the best performing sector YTD up 43%.

Source: SPDR sector tracker

Anyway, what’s done is done. If you’ve taken a hit, pick yourself up and learn from it to become a better investor. Remember to fall forward.

If you’ve managed to cash out at or close to the peak, congratulations are in order. Give yourself a pat on the back. Go out and stock up on champagne to share with your loved ones this holiday season.

As the year comes to a close, this is the time most people will look back the past year and reflect on what the year has taught us. Taking those learnings, we can look forward to a better and brighter year ahead regardless of what the media (both mainstream or social) might portray. This is also one of my favourite times of the year where I think about the year ahead and read about what others are looking out for too.

A fun little exercise is of course to make predictions for the new year and putting them down so that we can have a look back when 2022 ends and have a laugh or be utterly impressed at our uncanny sixth sense (unlikely). I’ve also drawn inspiration from Saxo’s Outrageous Predictions 2022 which is always an interesting read at the end of every year.

So in the spirit of the holidays and reflective mood as we come to the close of another year, here’s my outlook for 2022 and how these might affect my investment portfolio.

In short, I’ll be keeping a close eye on 3 key trends:

  • Inflation and rising interest rates
  • Growth-to-value rotation
  • China recovery

Inflation and rising interest rates

The Fed has finally capitulated on inflation concerns and provided greater policy certainty on bond tapering and rate hikes for next year. Seems like the Fed is happy to stay slightly behind the curve but we should all better hope they don’t fall too far behind it.

My personal view is that inflation will not ease next year, at least not yet. With so many companies going out of business in the last 2 years of pandemic, it will take time to new ones to pop up and fill in the gap when demand eventually returns to pre-pandemic levels. That just means that supply will continue to lag demand.

On the bright side, we might have already seen a peak in commodity prices although most have stabilised at much higher levels than just a year ago.

Since the Fed kicked off the accommodative cycle with QE, both stocks and bonds (and almost every other asset class) has risen in price. However, as the Fed starts to reverse course, we might similarly the opposite trend in stocks and bonds. That said, I believe stocks will still continue to outperform especially if the economy continues to show strength. However, returns will not be as parabolic as the past few years.

For the portfolio, I’ll be looking to reduce or eliminate exposure to bonds. With higher interest rates, current bond yields will become less attractive and thus bond prices should decline. On the other hand, higher interest rates should benefit banks of which I’ve been slowly building up positions, specifically in DBS (SGX:D05) and JPMorgan (JPM).

Other stocks I’ll be looking for are of companies with net cash position and strong revenue growth despite the pandemic and supply chain disruptions, e.g. most Big Tech companies.

Growth-to-value rotation

The growth-to-value rotation has been a tied to the reopening theme over the past year. However, since the reopening has been a start-stop affair due to discovery of new coronavirus variants, the growth-to-value has also been to-and-fro.

As we approach close to a fully vaccinated population especially in developed countries, I expect restrictions to continue to ease and support a more permanent reopening. As more countries achieve high vaccination rates, borders reopen, and economies start to gain momentum, I would expect more companies in cyclical industries – usually considered value stocks – could outperform.

Growth at any cost and pandemic plays will probably take a back seat and I would be wary of high growth companies with poor profitability and cash flow generation metrics. Valuation bubbles will probably continue to deflate until a point where growth investors feel that there is sufficient safety margin to jump back into these names. I expect caution to prevail in growth stocks especially hypergrowth next year.

For the portfolio, I’m looking to add to my existing value stocks JPM and AbbVie (ABBV). I might also look to add exposure to cyclical sectors that will benefit from a strengthening economy and higher inflation. That said, I’ll still be looking to pick up growth names for the long-term especially if prices continue to decline, assuming no deterioration in fundamentals.

China recovery

As the US Fed kicks off monetary tightening, China’s PBOC on the other hand is easing monetary policy to try to cushion the blow from the growth slowdown and prevent debt default contagion triggered by the property sector. Read here.

There has been a lot of pessimism in the Chinese stock market, after a series of bad news for the country’s economy. The decline started with the tech crackdown, and was exacerbated by the Evergrande property crisis and repeated lockdowns. That has translated to a severely beaten down stock market, which is now trading at arguably undervalued and very attractive prices.

Hopefully with the government pumping in more liquidity to support the Chinese economy, that would reignite growth and lead to higher stock prices in the long run. I’ll be looking out for signs of recovery in China especially in the tech sector which has been beaten down hard over the past year.

Risk still abound in the Chinese economy thought, so I will be treading very carefully. Not gonna try to be a hero here, just getting some exposure and hope that China takes off and lives up to its economic potential.

For the portfolio, I’ll be looking to add to my existing position in the Lion-OCBC Securities Hang Seng Tech ETF (SGX:HST) but only when I see signs of a potential trend reversal which I don’t see yet. I’ve also added a small short-term position in Tencent (HKEX:0700). I might look into other undervalued HK stocks for short-term plays, with tight stop-losses just to be safe.

What is your outlook for 2022 and what are you looking out for?

Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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