CIO Outlook—Buckling Up for 2022

CIO Robert Horrocks, PhD, sees fascinating and surprising investment opportunities arising in the emerging markets and China next year. Fed actions to manage inflation and the ongoing challenges of the pandemic will be important factors but the performance of markets may ultimately depend on the success of well-managed companies in key sectors.

It’s always sobering to look back at past predictions and see how you fared. Notwithstanding the bashing that my ego is likely going to receive in 12 months’ time, here I go again: “How might things be different?”

Looking back a year, there was a lot that was on the mark: a shift from growth to value, the performance of “non-Asia” emerging markets, the importance of human rights and regulation, and reflation. And, as has now become customary in these outlooks (it seems to me), I offer the advice that trends tend to continue until they stop, or as my former head of research put it: “Both bull and bear markets always last longer than you think!”

I have to be particularly careful to remember this advice as I have a fairly contrary type of mind. (Just ask my mum.) In terms of market predictions, that usually displays itself as me seldom seeing a mean to which I do not want to revert. With that self-admonishment in mind, let’s take a look at a few of last year’s big market events and try to learn from them.

The Year of India

The gap between the performance of India and China was one of the biggest stories of 2021. It was far larger than I would have imagined. Currently the difference in the 12-month performance of a broad index of India and one of China is about forty percentage points. This gap compares to an average difference post-Global Financial Crisis of close to zero, and a standard deviation in the series of sixteen percentage points. The difference in the performance of the major indices may be greater still. So what caused this?

Well, partly, of course, it is the excellent performance of Indian companies—a remarkable bounce back in earnings from the trough of the pandemic. In addition, the boost that materials prices have had in Latin America has helped some of India’s export markets. Consequently, India’s current account moved from deficit into surplus and the usual weakness of the rupee was replaced with stability. Inflationary pressures, whilst building, have not taken hold and so we had the perfect scenario of profit growth, stable currency and a modest re-rating. Inflation in India is still a modest 4.5%—currently below the U.S.! Of course, perfect scenarios don’t often last for long; it is fair to say that I regard as less than solid the foundations for a further strong rally in Indian equities.