12th January 2022
Despite all interventions, the Covid-19 pandemic was still with us in 2021. While vaccines were successful at reducing death and hospitalisations in many countries, the threat of new outbreaks and variants still loomed large. At the same time, much of the world remains unvaccinated. [1]
Meanwhile, major central bank support continued, with interest rates remaining at or near record lows and quantitative easing programs continuing at a pace. This, alongside optimism over economies re-opening, helped to send markets around the world to new all-time highs.
However, 2021 also saw the re-emergence of inflation as a threat. After a decade of persistently low inflation, North America and Europe started to see price rises at a pace not seen in a generation. [2] On top of that, we’ve seen disruption to supply chains and in many industries labour shortages. [3] With inflation surging, central banks ended 2021 on a slightly more hawkish note. The US’s Federal Reserve has now started to wind down quantitative easing and has signalled three interest rate rises in 2022. [4] Meanwhile, the UK’s Bank of England raised its base rate. [5]
Parallel to all this, there has also been a growing professional and public interest in alternative finance, from the first generation of cryptocurrencies to newer innovations.
It is against this backdrop that we entered 2022. Below, several experts explain what they expect this year and how this may affect various themes, sectors and assets.
The big picture
Before getting into specific themes or asset classes, it is first worth looking at the economic outlook for 2022. According to Gregory Taylor, Co-founder of HANetf S&P Global Clean Energy Select HANzero™ UCITS ETF (ZERO) and The Medical Cannabis and Wellness UCITS ETF (CBDX), the spread of new covid variants creates a bit of a blind spot for the global economy.
Taylor says: “Looking out to the year ahead, the global growth outlook hinges on keeping the recovery on track. Global vaccination progress remains critical to reduce the virus’s impact on real gross domestic product (GDP) growth. Unfortunately, the situation with the virus remains very fluid. The emergence of Omicron presents a new twist, and admittedly with the science still playing catch up, it creates bit of a blind spot. Vaccine efficacy and the severity of the disease are two large unknowns at present.”
However, according to Taylor, who is also Co-founder of Purpose Enterprise Software ESG-S UCITS ETF (SOFT), there are also reasons to be positive. He says: “We are hopeful that the global economy will continue to rebound despite current headwinds in the form of supply chain bottleneck pressures and ongoing pandemic flareups. Mobility restrictions introduced in Europe and potentially other parts of the globe are damaging to growth but likely not comparable to last winter in terms of duration or strictness. Rather than focus on risks that we believe will continue to fade over the course of the year, investors should keep in mind the strong fundamental currents below these headwinds.”
Against a backdrop of rising inflation, there is also the risk of central banks raising interest rates too quickly. However, Taylor argues that this is better seen as an adjustment period. He says: “2022 will be a monetary adjustment year as policy moves back towards normal. Given current economic strength, we don’t believe a recession is imminent, which has us believing this will simply add to market swings but not trigger a bear.”.
COVID-19 and more will continue to drive tech
With the pandemic still with us, it is not unreasonable to expect technology and healthcare to continue to benefit. According to Anthony Ginsberg, Co-founder of HAN-GINS Tech Megatrend Equal Weight UCITS ETF (ITEK) and HAN-GINS Indxx Healthcare Megatrend Equal Weight UCITS ETF (WELL), the pandemic has fast-tracked spending and demand in these areas.
One particular area that will continue to propel technology firms is working from home (WFH). While many companies have re-opened offices, it has largely become the norm to opt for a hybrid model, with workers staying home some days and attending the office on others. One key result of this is increased spending on cloud technology.
Ginsberg, who is also the Co-founder of the HAN-GINS Cloud Technology Equal Weight UCITS ETF (SKYY), explains the numbers: “In Cloud computing, the global market is expected to exceed $1 trillion by 2025. [6] The majority of Tech spending is speedily moving to the Cloud, away from hardware." [7]
Another aspect of the continued WFH trend has been increased spending on cybersecurity. However, it is not just the WFH aspect driving this. As Ginsberg notes: “Demand for cybersecurity protection is expanding – particularly in the US, boosted by recent large hack attacks and WFH trends. More cybersecurity data breaches occurred in 2020, than the prior 15 years.” [8]
When it comes to healthcare, one big area of growth during the pandemic has been telehealth. Adoption grew during the pandemic, as it allowed patients to access medical professionals remotely. At its peak, the use of telehealth was up 78 fold from pre-Covid levels. Use has since declined somewhat, but is still way up from pre-Covid. With sentiment towards telehealth generally positive, McKinsey expects adoption to continue to grow. [9]
Big tech is increasingly taking an interest in healthcare. According to Ginsberg: “The Digital Healthcare space is experiencing an influx of Big Tech deals. The US Healthcare industry is ripe for Tech upgrades, with healthcare representing almost 20% of US GDP.” [10]
Another obvious winner of the pandemic in 2020 was e-commerce. As lockdowns eased in 2021, e-commerce sales have continued to grow. For example, according to Adobe, online sales from November to December 31 should hit $207 billion, which would represent a record gain of 10%. [11] Similarly, over 87% of consumers said they intend to shop online during the Christmas season, also an increase of 10% over last year. [12]
This suggest that’s the shift to e-commerce has the potential to continue, even if 2022 sees the pandemic risk recede and lockdowns avoided. However, there are also other reasons to think e-commerce is well positioned to benefit in 2022.
According to Jane Edmondson, Co-founder of Global Online Retail UCITS ETF (IBUY), supply chain and labour shortage issues, if they persist into 2022, will make bricks and mortar retail less attractive, benefitting e-commerce. Edmonson explains: “if you go into the store and they are out of merchandise, you are just out of luck. Online there are so many different sites to source inventory from. Online will be a big beneficiary of these supply chain dislocations”.
The clean energy revolution continues
Last year was also a landmark year when it came to climate change. Governments, businesses and consumers continued to wake up to the threat posed by climate change. It is now widely accepted that CO2 emissions are heating up the planet to catastrophic effect, with far-reaching humanitarian and commercial consequences. [13] With this in mind, world leaders converged on Glasgow in October and November of 2021 and reaffirmed their commitment to achieving net zero. Now, countries representing 90% of global GDP have made some sort of net zero pledge. [14]
According to Gabriela Herculano, Co-founder of iClima Global Decarbonisation Enablers UCITS ETF (CLMA), 2022 is the year that marks the “end of the beginning” and the “beginning of the end”. She says: “The Biden administration’s efforts are part of the momentum creation, as well as the commitment of India and China to reach power sources from renewable energy of 50% and 25%, respectively, by 2030. 2022 will mark the end of the beginning for the green growth companies. Renewables will no longer seen as concepts or niche solutions, but proven technologies. So that means 2022 is also the beginning of the end for fossil fuel.”
With inflation the current hot topic in economics, the deflationary benefits of renewable energy will also be increasingly recognized, argues Herculano, also Co-founder of iClima Smart Energy UCITS ETF (DGEN).She notes: “Deflationary long term benefits of the two key technologies, namely solar panels and batteries, will continue. On the other hand, fossil fuel inflation is likely to continue. NatGas, coal and oil will continue to go up. Jeff Currie at Goldman Sachs expects around $100/barrel for end of 2022, so more price pressure from current $77/barrel.” [15]
Gold in a rising rate world: where next for the precious metal?
With inflation and monetary policy continuing to occupy minds in 2022, it is also important to consider the outlook for gold. The precious metal was hovering at around $1,800 an ounce in December 2021. That’s around $300 down from its peak reached in 2020. [16]
Several factors have been weighing on the price of gold. First, gold is seen as something to hold in uncertain times, when investors have an elevated sense of risk. With the success of vaccine rollouts throughout 2021, the sense of uncertainty and risk around the virus faded – at least until the final quarter of the year.
However, also weighing on the price of gold has been the prospect of central bank interest rate rises. As noted above, gold may be a safe-haven asset, but it competes with other asset classes as the preferred haven of investors. Unlike government bonds, the other major safe haven asset, gold produces no cashflow or income. As a result, when interest rates are declining, gold can become more attractive relative to bonds. Likewise, when rate rises are expected, the price of gold suffers.
So what does all this mean for the outlook in 2022? In theory, the risk to gold in 2022 comes from central bank’s continuing to tighten monetary policy. Higher rates, in theory, make gold less attractive.
However, according to Eric Strand, Founder of the AuAg ESG Gold Mining UCITS ETF (ESGO), this is too simplistic a way to look at it. According to Strand, rate hikes will be small and unable to keep up with inflation, meaning that real rates (that is the interest rate after accounting for inflation) will become even more negative, increasing the attractiveness of gold.
Strand explains: “Upcoming rate hikes during 2022 will probably be very small because the system cannot handle interest costs with a rate over 2%. As inflation will likely rise faster than rates, it will result in an even more negative real rate. A negative real rate trend is an environment where gold thrives.
“We, therefore, see a strong tailwind for gold and think we will see a new all-time high in the first half of 2022. We would not be surprised if it comes during the first quarter already.”
With this in mind, Strand says that currently gold is cheap. But, he points out, gold miners are even cheaper. He argues: “In today’s world, with unabated money printing, gold is cheap. Gold miners are even cheaper when you put them in historical comparison with gold and the broad stock market. Gold miners are a leveraged play on gold, and with low debt levels and record profits, they can now also raise their dividends to shareholders.”
Midstream energy: an alternative way to play inflation
Gold, however, is not the only way investors can try to get ahead of sustained inflation. Energy and other commodities have long been a favored asset among investors when faced with the prospect of inflation. But midstream energy exposure may be particularly well suited to this.
Midstream refers to points in the oil production process such as the storage, processing, and the transportation of energy products. Companies involved in midstream energy include pipelines and storage facilities. While still related to the energy industry, most energy infrastructure business lines do not have direct exposure to commodity price fluctuations. Their businesses take place on a set fee per volume or fee for service basis.
According to Stacey Morris, Co-founder of Alerian Midstream Energy Dividend UCITS ETF (MMLP): “midstream space is well positioned for an inflationary environment given its real asset exposure and the nature of midstream contracts, which often have rate adjustments for inflation.“
Typically, midstream is less sensitive to rising interest rates than other income sectors like utilities. Rising interest rates are not expected to be a headwind for midstream this year; rather, rising interest rates could support a rotation into value, which could be beneficial for energy broadly, including midstream.”
Crypto: rampant growth of an emerging asset class
It would be no exaggeration to say that 2021 was a landmark year for cryptocurrencies. The value of key cryptocurrencies soared, with Bitcoin hitting an all-time high of $69,000 per coin. At the same time, interest from institutional investors steadily increased, with inflows reaching record highs. [17]
We’ve also seen a proliferation of new products, from the US regulator finally approving a bitcoin-futures ETF to a host of new alternative coin ETCs becoming available to investors. Meanwhile, corporates including TikTok, MasterCard and Visa have rushed to show off their crypto credentials.
We’ve also seen growing interest in newer, niche areas of the crypto-world. Non-Fungible Tokens (NFT) have started to enter the mainstream, as have previously esoteric concepts such as the metaverse.
So what does this rampant growth of the crypto and digital asset economy mean for 2022? According to Bradley Duke, Founder of BTCetc – ETC Group Physical Bitcoin (BTCE) and ETC Group Digital Assets and Blockchain Equity UCITS ETF (KOIN), it is important to keep in mind the crypto economy is just getting started. He argues: “We remain just at the very beginning of crypto integration into the mainstream: only around 220 million people worldwide own cryptocurrency in one form or another, according to the latest estimates. [18]
“Institutions are alive to the potential in the sector and don’t want to be left behind. However, they must have investment products that allow them to invest safely and securely on regulated exchanges.”
Duke also argues that cryptocurrencies are well-placed for the macroeconomic outlook in 2022. Inflation hit levels not seen in a generation in 2021. During that time, Bitcoin also reached new all-time highs. Duke explains: “Bitcoin topped $69k in response to surging US inflation, which hit a 31-year high in October. This has strengthened crypto’s inflation hedge narrative, with more convinced that digital assets are a lightly-correlated asset class worthy of further investigation.”