New Delhi: A year ago, the average stock market strategist might not have seen that the best performing index in the world in 2021 would be Mongolia, or that a chain of theaters would be multiplied by 13.

And while many were optimistic, few predicted the ferocity of the rally that has pushed European and US stocks to successive record highs, or the decline after the emergence of the omicron variant of Covid-19. Even fewer had predicted the slump in China or the liquidity crisis affecting developers in the country.

In short, it was a year of surprises – that was the least surprising thing about it. Getting the details right in 2022 won’t be any easier, but a few big themes are likely to persist.

Covid-19

Pandemic developments have been the main driver of the market for almost two years, causing a crash in 2020 and then a sustained rally on the backs of vaccination programs that have allowed an economic reopening. And now concerns about the omicron variant have taken its toll on global stock indexes.

Most strategists expect the virus to become a side note next year, as the advent of antiviral pills from Pfizer Inc. and Merck & Co. adds to humanity’s arsenal against fatal infection. This majority view has not changed in the face of warnings that the new strain may not respond to existing treatments.

Yet if there’s one thing the pandemic has taught us, it’s that equity strategy is one thing, and epidemiology is another. And even if the virus becomes an endemic nuisance, the roller coaster of restrictions to isolate those infected “turns into a more persistent drag on growth,” said Romain Boscher, global director of equity investments at Fidelity International.

Even if the virus were to disappear from our lives, it would likely still define the direction of the stock market, as there would no longer be grounds for fiscal and monetary stimulus – two of the main drivers of this year’s exuberance.

Inflation

Markets have watched soaring prices this year, and for good reason, as soaring corporate profits have proven that businesses can pass the higher costs on to a consumer who remains willing to spend.

If inflationary pressures ease in the coming months, don’t expect a rally of relief because that’s what stocks have valued. The strategists inc. Dominic Wilson and Vickie Chang wrote in a note.

If price pressures persist or even intensify, things could get complicated. Stocks are only a good hedge against inflation up to a point, which Oddo BHF, WallachBeth Capital and Lombard Odier rate between 3% and 5%. Sustained price growth above 4% would erode earnings and hurt stocks, according to Florian Ielpo, macro and multi-asset manager at Lombard Odier.

High inflation would also push central banks to tighten policy, increasing borrowing costs for heavily indebted countries like Italy and draining liquidity from the market. Federal Reserve Chief Jerome Powell drew the first blood last week, warning of the possibility of a faster cut in asset purchases.

Morgan Stanley’s Graham Secker said the impact of the possible European Central Bank reduction on peripheral European debt is one of the biggest downside risks next year, while strategists at JPMorgan Chase & Co . identified a hawkish shift by central banks as the main downside to their bullish outlook.

Decarburization

One of the reasons inflation could stay structurally higher is the transition to climate neutrality, a goal the world’s largest economies – from the United States to India – have collectively committed to this year. Higher carbon prices and environmental taxes are pushing up industrial production costs, while underinvestment in fossil fuels has contributed to soaring energy costs that threaten to dampen growth and disrupt production. .

On the flip side, asset managers at BlackRock Inc. in Nuveen say decarbonization is creating unprecedented investment opportunities. Just look for examples of electric cars: Tesla Inc. shares have risen over 1000% since the start of last year, while the market value of Rivian Automotive Inc. has briefly climbed to over $ 100 billion. dollars after trading debuts last month, even though its sales are virtually non-existent.

With the Green Party now in government in Europe’s largest economy, decarbonization actions could be boosted after this year’s cuts for companies like Siemens Gamesa Renewable Energy SA and Vestas Wind Systems A / S.

The metaverse

Facebook’s rebranding has drawn attention to a growing space for economic activity outside of the physical world, from social media to gaming platforms. Chipmaker Nvidia Corp. and video game company Roblox Corp. are just two of the stocks that briefly rose after Mark Zuckerberg renamed the company he co-founded to Meta Platforms Inc.

The metaverse – digital worlds where users can socialize, play games and do business – is a multibillion-dollar opportunity, according to Tim Sweeney, CEO of Epic Games Inc ..

Already, a digital model of a Gucci bag, which can only be used in a gaming platform universe, can cost more than the physical version. That’s because people in the developed world now spend more time online than interacting in physical spaces, according to Morgan Stanley. While the movement has gathered pace with stay-at-home orders during the pandemic, it is expected to continue in the years to come and could take off when Apple Inc. joins the party.

China

Beijing this year rolled out sweeping measures to slash profits for tech giants and tutoring firms, and imposed restrictions on lending to real estate developers to reduce its reliance on the industry. At the same time, soaring ex-factory prices have made it difficult for companies to maintain profit margins, while the lack of meaningful easing measures by the country’s central bank in recent months has weighed on economic growth.

Chinese offshore stocks in Hong Kong are among the worst in the world this year, while the Nasdaq Golden Dragon China index is down more than 50% from its February high. The MSCI China Index is near the lowest relative to global equities since 2006.

Yet many global institutions are becoming more constructive towards Chinese equities.

BlackRock considers the peak of regulation to have passed and expects more pro-economic measures to start having an impact in the new year, while BNP Paribas predicts that Beijing will adjust its policies towards real estate developers and will support the private sector at a key economic meeting this month.

“We believe now is the time to position ourselves,” BlackRock portfolio manager Lucy Liu said in a briefing on November 23.

Goldman Sachs is optimistic about investment opportunities associated with President Xi Jinping’s “common prosperity” campaign, such as renewable energy. And UBS Group AG says tighter regulations have been incorporated, while company earnings and valuations are expected to improve.

And there’s more…

Staying on top of these themes will not necessarily guarantee significant returns for investors. Potential black and white swan events lurk everywhere: from the midterm elections in the United States to the French presidential vote, and tensions in Taiwan to a widespread crisis in the Turkish economy following the fall of the pound. Supply chain bottlenecks will continue to be watched closely, while global warming is another wildcard traders may need to consider.

It’s no surprise, then, that there is no consensus among the world’s most prominent strategists on the direction of the stock markets: as Max Kettner of HSBC Holdings Plc advises investors to start unplugging stocks in the first half of next year, and sees things improving in the second half of the year UBS Global Wealth Management predicts exactly the opposite: a good start followed by a deterioration in the outlook towards the end of the year.

As Goldman Sachs sees the markets advance next year, Bank of America Corp. takes a rather apocalyptic view, predicting low or negative returns, and in any case volatile in 2022.

And if we’ve learned anything from 2021, it’s that focusing on the fundamentals of the companies you invest in isn’t always the most rewarding strategy. By ignoring these principles, some retail investors made a lot of money last year, with AMC Entertainment Holdings up about 1,200% and GameStop Corp. returning over 800% for no apparent reason than a social media-fueled craze.

Going forward, Goldman Sachs advises investors to be selective, avoid companies with high labor costs and stocks fully valued against long-term growth expectations. But again, that’s exactly what strategists advised last year.