History shows us that the biggest risks in a typical year aren’t usually from out of left field (although that sometimes happens, as it did in 2020 with the COVID-19 outbreak). Rather, they are often hiding in plain sight. As goes one of my favorite quotes often attributed to Mark Twain: “It ain’t what you don’t know that gets you in trouble, it’s what you know for sure that just ain’t so.” Risk appears when there is a very high degree of confidence among market participants in a specific outcome that doesn’t pan out. So, by identifying the unexpected, here are our top five global risks for investors in 2022, in no particular order:
- Shortages turn into gluts
- Rate hikes slower than expected
- China goes from cracking down to propping up
- COVID waves may not resemble those of 2021
- Geopolitical surprises
In 2020, economies around the world were worse than anyone had forecast. But that wasn’t true in 2021: in most countries, recoveries were surprisingly rapid. That’s a useful reminder that the risk of surprises is not always to the downside. The balance of our unexpected risks may skew to the upside in 2022. Despite the strong year for stocks in 2021, markets have confidently priced in some negative trends gathering more momentum in 2022 that may help the market should these trends reverse.
Shortages turn into gluts
Supply shortages lifted inflation and slowed production throughout 2021 as strong demand outstripped supply, amplified by supply chain logjams. Although many expect these delays to linger through the next year, history shows us that shortages often rapidly lead to gluts. Should a supply glut emerge in 2022, it may lead to a fall in inflation with excess inventory prompting price cuts and posing risks to industries that have thrived on the shortage-fueled pricing boost.
The transition from shortages to gluts can be rapid.
- The pandemic created a shortage of masks and gloves in the first half of 2020. Top Glove, the world’s biggest maker of disposable gloves, saw its earnings prospects and stock price soar. Analysts’ earnings estimates jumped by 1400% and the stock price rose by over 400%. When demand began to return to normal, earnings forecasts plunged and the stock gave up all of its gains.
- We also saw this pattern unfold with home exercise equipment, as you can see in the chart below for Peloton Interactive, of one of the largest fitness companies in the world. After strong order growth in 2020 created shortages leading to both surging earnings and stock prices, demand quickly turned around leading to a round trip for both.
Home exercise equipment shortages turned around quickly
- This year we have seen a boom and bust swing in both coal and natural gas prices, which have both fallen by 38% after surging to 10 year highs in October.