Dubai: Whether you want to invest for retirement or grow your savings in the short term, you need to know how to put your hard-earned money to work in markets.
But successful investing isn’t as simple as throwing money at the market, and leaving the rest to fate. Modifying your investments according to how stock markets are seen performing in 2022 is critical too.
So here are seven frequently-asked-questions (FAQs) from investors and what they should know in order to improve their chances to end the year on better footing when it comes to better investment returns:
Investor FAQ #1: Will 2022 be a repeat of 2021 when it comes to stocks rising at a record pace?
Answer: Short answer, no. Why? Excess funds that kept stocks up in 2021 will start drying up in 2022.
Despite the ongoing pandemic, 2021 was a very good year for global stocks in the world’s top economies. In the world’s top two stock markets in the US, there were more than 20 per cent gains last year, while in another key market like Germany, stocks rose more than 15 per cent.
In the UAE, Abu Dhabi’s stocks rose 68 per cent last year, making it one of the world’s best performing exchanges, while stocks in Dubai ended 2021 about 30 per cent higher. In Saudi Arabia, stocks rose a little over 30 per cent. Bear in mind that the average stock market return is only 10 per cent per year.
Unfortunately, 2022 is unlikely to be the same due to many crucial factors, including, but not limited to, high inflation and tightening from the central banks when it comes to excess money in stock markets. In other words, the massive liquidity markets have enjoyed in the last few years is likely to start drying up.
Central banks around the world have taken money printing and easy monetary policy, such as low interest rates, as their key tools to boost economic growth. So when economies are flooded with money, it usually has to find a home; the money is flowing into the stock markets.
However, there have been concerns among investors and economists about what happens once they actually stop and bring their monetary policy back towards normalisation – raising interest rates and no longer printing money like they are doing now.
For example, the US central bank is printing $85 billion (Dh312 billion) a month, and its balance sheet has already ballooned more than $3 trillion (Dh11 billion) after the financial crisis brought the US financial system to near collapse. On top of all this, the world’s top lender is also keeping interest rates near zero.
Similarly, the central bank of Japan is taking the same measures and plans to increase its money supply extensively.
Investor FAQ #2: Economies are not recovering as fast as stock markets. Will this continue in 2022?
Answer: Yes. While some economies won’t rise as fast in 2022, there are some that will grow quicker.
But let’s first understand why are stocks rising but the global economy is not moving in tandem with stock markets.
The global economy is a set of systems under which money, industry and commerce are organised. Economic health is measured by employment and production growth. The stock market refers to a public marketplace in which stocks and other financial instruments are bought and sold.
So the economy and the stock market – while related – are not the same thing, because in the short term, the stock market's movements are random and unpredictable, while the economy is not. Moreover, a few enormous companies are behind the upward trend of the stock market as well.
The historically low interests set by central banks worldwide encourage investment in stock market as well, as other investments offer negligible returns. Markets are also considered forward-looking indicators, which means investors buy and sell stocks based upon their expectations for the future.
When you understand why, it becomes clearer why the global economy and the stock markets are diverging. Although in the long run, the global economy and the stock markets tend to move in the same direction, in the short term the divergence can cause some key economies to dip.
History also reminds us that the economies have recovered from many prior difficulties with both robust growth and growing stock markets.
It is likely that the contradiction between real economic growth and global stock market growth will keep expanding, creating a negative impact on long-term growth forecasts of economies worldwide.
The International Monetary Fund (IMF) projected global economic growth to reach 6 per cent in 2021, before falling to 4.4 per cent in 2022, with similar drops in forecasts seen in the US and China.
However, the Middle East is expected to grow by 4.1 per cent in 2022, unchanged from last year, with Saudi Arabia, likely to have stronger growth in 2022 by 4.8 per cent, up from 2.8 per cent in 2021.
Investor FAQ #3: How do I adjust my investments to factor an economy-stock market disconnect?
Answer: Selecting the right assets will be crucial, so give weightage to outperforming stock markets.
While the appetite for high-risk assets (assets that have significant price volatility, such as equities, commodities, high-yield bonds, real estate, and currencies) has not yet faded, selecting the right assets will be crucial in 2022, as investment returns from stocks are generally seen falling compared to 2021.
Saudi Arabia’s Tadawul stock market and the UAE stock indexes will be in the spotlight in 2022 as both countries decided to expand their number of public offerings (IPOs) and invest in further diversifications.
Considering upbeat investor sentiments and the stock market’s positive outlook for IPOs, the UAE’s Dubai Financial Market (DFM) will be the index to watch in 2022.
However, it would be wise to remain cautious on the rate hike process of central banks in 2022, with reality of potential rate hikes dominating stock market sentiment, versus the outlook concerning them.
The above scenario will also give another push to emerging markets (countries that have some characteristics of a developed market but are not yet a fully developed market) mainly in the second half of 2022.
Investor FAQ #4: When buying forex or currencies, which will fare better or worse in 2022?
Answer: Emerging market currencies to stay lower as inflation to hurt prospects; US dollar to dip.
Emerging market currencies will remain unfavourable in the short-term. As for inflation, it remains the most challenging factor (for prospects of currencies or forex) in 2022.
While we expect inflation in the US to fall in 2022 (it stands now at the highest in forty years), it is likely to remain above the top economy’s central bank target.
Moreover, stagflation fears are a very real threat to both economies and their policy makers, as investors will start shifting their portfolios in an aggressive way if their fears materialise.
One of the worst things that can occur to a currency is the effect of stagflation. When prices rise disproportionately to interest rates, the value of the domestic currency depresses. This, in turn, reduces the purchasing power of consumers.
As for the US, a gradual rise is expected in the interest rates which means that the strength of the US dollar is short-lived.
Additionally, the yields on the government’s debt-based investment like its 10-year treasury bonds now stand at 1.71 per cent, and a further increase to 1.92 per cent to 2 per cent in the short term is the target for 2022. What does this mean?
(A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future. In the worst case scenario, a government may print money to pay part of a large debt, but increasing the money supply inevitably causes inflation.)
Investor FAQ #5: What type of stocks (in what sector and geography) do I invest in more in 2022?
Answer: Buy more of financial stocks (based in Switzerland and the Eurozone), EVs stocks (in China).
The financial sector (firms that provide financial services), green energy (ESG), airline stocks and industry disruptive technology trends will be global stock market favourites in 2022.
As the global rate hike is likely to take place in 2022, the financial sector will be a good option, mainly with banks with a strong balance sheet, higher earnings and lower provisions (liabilities). The financial stocks in Switzerland and the Eurozone are preferred.
As China is more reliant on digital transformation and electric vehicles (EVs), this creates huge potential in these sectors. Investments based in China is expected to deliver good growth and returns by the end of 2022.
Investor FAQ #6: Should I increase exposure to gold in 2022? If yes, where specifically?
Answer: With inflation rising globally, so will the price of gold; watch out for ETFs, gold mining stocks.
The higher the inflation, the higher the demand for gold. (It is widely observed that higher inflation is good for the price of gold is based around its use as an inflation hedge. In other words, gold is an asset that will hold its value better than others as the value of currencies are eroded by price rises.)
While gold lost almost 5 per cent in 2021 due to the strength of the US dollar, gold remains one of the most popular tangible investments for 2022 as we don't expect the US dollar to remain so strong this year, and positive investment returns will be short-lived if this happens.
But what does this mean? It means that the second half of 2022 will be the important one to watch, as the US central bank is likely to hike the rate in March 2022, then wait to see what happens for the second half of 2022.
So Bullion (coins and bars of precious metals such as gold, silver, platinum, and palladium), exchange-traded funds (ETFs) backed by gold and gold mining equities that give dividends will be favourites in the medium to long term perspective.
Investor FAQ #7: Should I put more money in crypto this year or the next? If yes, where specifically?
Answer: Crypto will continue to boom in 2022, keep an eye out for crypto ETFs, meme coins.
It is expected that the investment trends in crypto and digital assets will continue to boom, as the momentum seen in 2021 is unlikely to diminish in 2022.
Tough dialogue between regulators and crypto exchanges will continue, and some regulations are inevitable. More crypto-related ETFs and funds will join the trend, and the meme currencies will keep the buzz in 2022.
Bitcoin and Ether will remain the top cryptocurrencies in terms of investment from the big hedge funds and ETFs.
As for the region, the UAE and Bahrain will continue to be the best places for the smartest crypto regulations.
However, with the arrival of US-based Binance – the world's largest cryptocurrency exchange by trading volume – in Dubai, and the expansion of global bitcoin exchange Kraken through Abu Dhabi Global Market (ADGM), the UAE is likely to be the hub of digital and crypto asset innovation and development in the Middle East.
Investor FAQ #8: Tell me a way I can keep my investments protected from any volatility this year?
Answer: Seek shelter from market volatility by buying more healthcare stocks.
An interesting option for investors in 2022 is to build a solid healthcare portfolio if they are looking for stable returns with dividends and future growth.
Healthcare is a defensive sector that can be a safe haven in times of market turmoil, so it can help investors prepare for black swan events. Who knows when the next one may strike?
Final thoughts..
Investors should be more open to being pragmatic as they keep looking for higher returns in 2022.
New investment tools such as structured investment products and dividend-paying stocks should be considered, and strategic portfolios should be shifting more rapidly.
In other words, tactical allocation of assets or investments is an option that investors should not ignore.
- Chaddy Kirbaj is the vice director at Swiss banking group Swissquote Bank’s Dubai office
