As the world enters the third year of its battle with the COVID-19 pandemic, economists predict the recent recovery will continue, albeit with differing performance across geographic regions.

In its recent commentary on the year ahead, investment bank JP Morgan said the investment landscape will shift in 2022 as the novel coronavirus shifts from pandemic to endemic and central banks begin winding back emergency stimulus measures.

The bank expects investment markets will continue to recover under these circumstances, but added this will be more pronounced in less developed markets.

“The fastest recovery growth phase is likely to be behind us in developed economies such as the US and Europe, but it is still accelerating in Asia and emerging markets,” the bank noted.

As immunity to COVID-19 within these populations trends upwards – through both vaccination and infection – governments across Asia and emerging markets will have greater capacity to reopen their economies. 

As a result, their economies are expected to see higher rates of growth in the coming year than their developed peers, which have already commenced down the path to reopening.

Inflated sense of worth for value stocks

Last year’s widespread predictions of a return to inflation appear to have materialised, with US inflation ending last year at a 39-year high with more gains expected, and Australia’s central bank similarly forecasting prices to climb in the coming 12 months.

That’s good news for value stocks, which are less susceptible to macroeconomic changes like central banks increasing interest rates to combat inflation.

Value stocks have underperformed their growth stock peers for the better part of the last decade, as record low interest rates helped those growth stocks see significant gains – over the past five years, for example, the MSCI World Growth Index has returned 21.3% yearly, while the MSCI World Value Index delivered only 9.8%.

Signs of a reversal of these fortunes began to appear in the first half of calendar year 2021 and while this momentum did not last the year, Realindex head of investment David Walsh said inflation in the year ahead may prove beneficial to value investors.

Amid widespread speculation that inflation will boost the fortunes of value-style stocks, Mr Walsh told Morningstar subsidiary Firstlinks:

“We don’t believe it’s quite as simple as that, but we are watching this unusual confluence of events and think there may be some positive impact on value stocks.”

Morgan Stanley head of Australian macro research Chris Nicol took this further, telling The Australian Financial Review it would be “prudent” to respect companies with better valuations relative to earnings as the costs of capital and doing business both increase.

Mr Nicol said 2022 could be the year value stocks begin to outperform growth stocks again – a sentiment shared by investment houses VanEck and Franklin Templeton.

Sources

• J.P.Morgan Asset Management, The Year Ahead 2022
• Financial Review, Value set to shine as inflation, rates hit growth stocks
• CNN Business, Why prices will keep soaring in 2022
• ABC News, Interest rate hikes and rising inflation may lead to ‘more volatile’ market in 2022
• First Links, 10 big investment themes to watch in 2022