What to Look Out For in 2022

Firstly, 2021 was another great year for tech stocks with U.S software going up 32.9%. This has in turn driven the S&P500, which is weighted towards tech stocks, up by 25.13% (YTD Dec 15 2021). I have thought for a while these rises are built on expectation rather than actual profits in the company earning that seems to be somewhat irrelevant to the stock prices these days with P.E ratios getting higher and higher.

An example of this which many investors will hold directly or indirectly is Microsoft, it’s gross profit has risen significantly less than its share price that is up 54.78 (Dec 15, 2021 source: Yahoo finance)
https://finance.yahoo.com/quote/MSFT/key-statistics?p=MSFT

So, from a fundamental part what does this mean?

Personally, I believe that tech stocks can’t keep growing like this. It seems to be propped up by a magnitude of factors, retail investors going more into equities in a low yield environment and over-optimism. I still believe in growth for the long term, but due to the factors as stated above, I would not be at all surprised if for the next 2-3 years growth stocks are somewhat stagnant in companies that have already priced in future earnings.

Portfolio Sectors

In terms of portfolio sectors that am looking at in the medium to long term are basic aspects in terms of stocks. Look, for companies with good working capital to allow to profit if rate hikes are implemented that many major central banks have hinted in 2022/2023.

A high-profit margin will help absorb this inflation and keep a low debt ratio. Also, I am interested in value defensive sectors such as tobacco, oil and banking that have been left behind in the stock price hike over the last 20 months. For numerous reasons from the ESG push and out of flavour yet many of the companies are yielding a high dividend and stable balance sheet.

In cases such as Philip Morris, they have taken mergers in health care companies and changed their philosophy to change the dynamics of where they get profits. If this is completed correctly it will go from tobacco to health care. Similar to big oil companies looking to go into renewables with vast resources and infrastructure already in place.

For sectors and regions to look out for, I have written a number of blogs and articles about China in 2021, as one of the true value sectors and think it will do well over the coming years.

China

China saw major events that hit the stocks hard, one has the education ban. (seen below in Tal educations share price). The other was Evergrande. This shows a tale of the bad side of China, firstly how fast it can implement legislative changes to change an economy. This was also seen earlier in the year with CCP taking action on the Chinese tech giants.

Secondly, which is more concerning is the debt problem, a statistic showed that China in three years, used more cement than the U.S. did in the whole of the 20th century. You can go online and see the ghost cities that China has. This isn’t excluded from the housing sector but also goes onto the rail sector to the massive debt problem. Evergrande is unlikely to be a systemic risk to China economy due to the CCP bailout and not wanting a Leman scenario again, but it is a sign of what is happening and is just one of many companies with a similar problem of massive debt. The question asks, can China keep this at bay?

Personally, I see them doing so due to the strong link the government and private sector have in China. But, do see it affecting certain sectors such as construction that will have a knock-on effect on the global economy having a chain reaction on aspects such as Australian mines that rely on Chinese manufacturing.

Now, to the good. Without a doubt, it comes at a risk, mainly political and regulation when investing in China. However, what most people have missed is that President Xi, is aiming to drive the middle-class income in a country that has already lifted 800 million out of poverty in a generation.

What would a high average income do the Chinese market?

The answer is more consumer spending and trickle-down economics working in action. Something that the U.S. seems to have trouble with as the rich get richer and those earning $1500 seem to stay at the same rate. Thus giving Musk and the others an extra $10 billion will have little effect on the broader macro environment.

However, giving those earning $700 an extra $700 will see a broader change in spending habits and due to the fact that the CCP and Xi have a strong grip on the population, I see this being implemented. I was at a talk yesterday and referred to the fact that China is playing a long game of Chess brilliantly, meanwhile, the U.S. is playing checkers.

https://www.theguardian.com/media/2021/oct/05/richest-americans-became-richer-during-pandemic

Other Sectors

Other sectors that I see promising are healthcare and biotechnology, this is brought on by basic demographics, the world is getting older and this will lead to aspects such as funerals becoming more popular but also needing more health care.

I see the next 20 years the area for advanced health care to come to light brought on by demand. This will lead to other factors in the workforce one being innovation and can only look to Japan, which has an already ageing population on how it is trying to tackle the situation.

Bonds

Moving away from equities, bonds that have been disregarded for the last 10 years could see a comeback. Major central banks are looking to raise interest rates but in emerging countries yields are looking reasonable and see active bond funds potentially gain from this with areas such as Poland, which has been the beneficiary of much E.U funding and have a 10 year of over 3% return. a good buy. It is also predicted 5.4% growth which looks like an optimistic hold.

Source: Focus economics

Personally, I would stay clear of most LATAM bonds but see eastern Europe where value is and potentially some ASEAN countries.

Worries in 2022 to a portfolio?

Lots of talk around the Omicron variant, I personally am not worried as a long term investor as will be another blip in the stock market and (let’s see if I am right) 5+ years not many will remember it and will have very little effect on good companies long term outlook.

Those worrying about a company that has been hit due to this factor, I would say has invested wrongly and picked a company or fund and selling it when the world economy is down is backward unless you are forced to sell. The only opportunity it might bring is to buy good companies at a cheaper rate and again what to look out for are those with are:

• Good balance sheet
• Good profit margin
• High MOAT
• Long term outlook.

After that, I would personally not worry too much about other events and stick with the good companies.

These are all my opinions and personal preferences, if you want financial advice, please seek an advisor. This is not financial advice and I am not suggesting you invest in any of the above.

Henry Temple-Baxter

Henry Temple-Baxter is the founder of Investments for Expats and is CISI Level 4 qualified. A long-term expat himself, he has lived and worked in Kuala Lumpur, Beijing, Bangkok, Hong Kong and Ho Chi Minh City. He set up the firm in 2018 to give UK expats fee-only, transparent advice on pensions, tax and investing abroad.

This guide is general information, not personal advice. Tax rules can change and their effect depends on your circumstances. Capital at risk.