Here Are the Top Investment Themes to Look Out for in 2022

Market outlook stocks

Billy Toh

December 23, 2021

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The global economy was severely affected by the COVID-19 pandemic in 2020 but a sharp rebound was seen in 2021.

The recovery was mainly due to government policy support and the rollout of vaccines globally.

However, the recovery has been uneven and most Emerging Market countries have yet to see their economies recover to pre-COVID levels.

Going into 2022, I expect the recovery to continue although momentum is likely to fade as policy support, such as the fiscal measures and monetary policy, will become less supportive for global growth.

The risk of a prolonged pandemic is still there with the emergence of the Omicron variant that is spreading significantly faster than the Delta variant.

The possibility of policy errors could also have negative implications on the global economic recovery, especially with rising inflationary pressures.

Nonetheless, even with all these uncertainties, 2022 is likely to be seen as the year that the world “shifts towards normalisation.”

From a big picture perspective, I think that the service sector will provide the key catalyst for economic growth and pick up from the devastating impact it suffered during the lockdown over the last two years.

The ongoing vaccination rollout globally, as well as the manufacturing of COVID pills, should help the world to gradually reopen next year.

In this environment, investors need to position themselves accordingly. So, here are five of the top investment themes to look out for in 2022.

1) Rotation into value stocks

Despite the uncertainties and negative perceptions with the US monetary policies going into 2022, I remain moderately bullish on the US stock market given the economic cycle that we are in today.

As the world adjusts to the “New Normal” during the pandemic, economic activities are likely to pick up.

This bodes well for the stock market, but investors should start looking for value stocks given the expensive valuation in the US market as well as the faster tightening cycle by the US Federal Reserve (Fed).

Value stocks that are trading at cheaper valuations, with stable earnings growth, mature businesses and consistent dividend payouts, will return to favour – especially among institutional investors amid the anticipated Fed rate hikes in 2022.

The higher rates will also boost bank returns and more infrastructure spending under President Biden will also remain supportive for economic growth.

2) The bull market for European stocks

European stocks may outperform the US market, thanks to its cheaper valuations and its anticipated economic recovery.

Aside from the anticipated economic recovery, the European Central Bank (ECB) is also expected to be less aggressive in their rate normalisation path as compared to the US Fed.

However, it is worth taking note that European equities have trailed the US for most parts of the last decade.

3) A different China growth story

China will be an interesting development for investors to watch out for in 2022 following the regulatory crackdowns that happened this year.

China’s President Xi Jinping has put forward a new policy priority in August this year with its “common prosperity” policy, which aims at improving equality and equity.

The policy emphasises expanding middle-income class in China and improving the living standards of the lower-income groups.

With a larger pool of middle-income citizens, this will benefit companies that target the consumer segment.

The US-China tech war will also benefit technology players in China, but as what we have seen in 2021, the technology sector is vulnerable to regulatory changes in China.

From a macro perspective, China’s growth is expected to slow but the slower growth is unlikely to derail the global recovery.

The impact will, however, be felt by countries that have strong export exposure in China such as Singapore, South Korea, Malaysia, Vietnam and Thailand.

Another area of concern is the debt level in China’s corporates as China Evergrande Group and Kaisa Group both missed bond payments this year.

At this juncture, the People’s Bank of China (PBoC) has mentioned that the risks posed to the economy by Evergrande’s debt crisis can be contained, citing the developer’s own poor management and reckless expansion.

It is hard to see a direct bailout by the government given its shift towards more inclusive growth.

Having said that, if more developers are affected, China is likely to limit the fallout from affecting the broader housing market. China’s real estate sector accounts for close to 30% of its GDP.

4) Emerging markets will recover

Most countries in Emerging Markets have yet to recover to pre-COVID levels as the recurrent waves of COVID-19 and lockdowns have severely affected growth.

However, as the world gradually shifts towards normalisation, EM countries, especially those in Asia, could benefit from the global recovery.

The key drivers for growth in EMs are the reopening of the economy, a shift towards digitalisation and investments directed at manufacturing facilities.

EM countries, especially those in Asia, will also benefit from the shift towards digitalisation.

The pandemic has shown the importance of the digital economy and has accelerated the adoption of digital channels such as e-commerce, banking, education, healthcare, logistics, data centres and even tourism.

The rollout of digital infrastructure plans in Indonesia, Thailand and Malaysia, are some of the catalysts that can drive the continued acceleration of digitalisation in this region.

Another key area is investments into manufacturing facilities, especially as the US-China decoupling risk has been heightened.

Corporates have announced investment plans into the EM region as part of their strategies to diversify away from the fallout of US and China relations.

5) Disruptive technology companies will continue to thrive

The US technology sector is likely to be affected in some ways with the shift towards value stocks

Even so, I think that tech players that have sizeable market share, dominance and strong track records in driving innovation are likely to continue to thrive in 2022.

This is because of “megatrends”, such as a shift towards the digital economy, a focus on climate change, the revamp of the global supply chain, and others that will require technology players to drive these changes.

Innovations such as 5G, cloud computing, machine learning, robotics and automation are key to these changes.

Take the example of climate change. While there is a lot of focus on electric vehicle (EV) companies, it also involves those in the semiconductor industry as well as upper stream suppliers in the EV supply chain and others.

Companies that are operating in cloud computing and other digital services will also benefit from the rise of EVs.

Focus on long-term opportunities

One of the worst things that I can do is to talk about investment themes without emphasising the importance of looking at long-term opportunities.

What was highlighted above are key areas for investors to tap into, especially in terms of near-term trends and tactical plays in navigating your investment portfolio.

While I believe some tactical shift in the investing playbook is required next year as the world adjusts towards normalisation – whether it is in the monetary policy, fiscal measures, reopening of the economy, advancement into digital economy or others – it’s vital to have exposure to long-term opportunities, particularly those in the tech space.

About the Author: Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.