Which investment themes could surge in 2022?

With COVID's impact continuing to be felt as we enter the new year, oil and gas, supply chain logistics and interest rates and inflation will all likely be key themes for the next 12 months. Here's what investors need to consider to keep their portfolios happy in the New Year.

 

Oil

Brent crude oil prices have surged in 2021, starting the year at $50.37 and closing at $75.24 on 31 December 2021. As demand thundered back following lockdowns, the price rose to a high of around $86 in October. Oil stocks have climbed as a result, with BP [BP] rising 29.7% overall last year and Chevron [CVX] up 38.96%.

In mid-December, Morgan Stanley chief commodity strategist Martijn Rats stated that oil could hit $90 a barrel in 2022 as “continued rising demand meets relatively spare capacity”. However, since he made that statement prices have dropped as fears over the new omicron coronavirus variant have arisen, leading to discussions of new lockdowns that would batter oil demand from sectors such as aviation, commuter travel and industry.

If it is as transmissible as believed, a swift omicron peak could be followed by a surge in demand after any lockdowns are lifted. Oil supply constraints are also expected to continue, particularly if there are continued social political scares such as a potential Russia-Ukraine military conflict.

What is clear is that even with the growth of renewable energy, the world has not yet cut its reliance on oil. “Renewables are not yet producing sufficient capacity to take the baseload strain,” says AJ Bell investment director Russ Mould. “Hydrocarbons are still important, whether we like or not, but supply is being constrained, partly by the machinations of OPEC and its allies, partly by geopolitics such as sanctions against Iran and Venezuela, and partly by oil firms themselves.

"Renewables are not yet producing sufficient capacity to take the baseload strain...Hydrocarbons are still important, whether we like or not" - AJ Bell Investment Director Russ Mould

 

He adds: “Fund managers are pressuring them to invest in renewables or simply disinvesting. This could create a supply-demand squeeze if the economy shakes off the latest strain of COVID-19 and keeps growing.”

 

Interest rates and inflation

Both the UK and the US are seeing a surge in inflation caused by factors such as the global supply chain squeeze and higher energy costs.

In response, the Bank of England has hiked interest rates. The US is expected to follow suit soon with potentially three increases in 2022. Morgan Stanley economists believe inflation will peak then retreat as supply chain pressures ease and commodity prices normalise. “To that end, central banks likely won’t take drastic measures to raise rates and pump the brakes on growth,” it states. “That said, investors have an almost Pavlovian response to any talk of tightening, which is just one of many reasons to approach US equities and Treasuries with caution.”

AJ Bell Investment Director Russ Mould believes the omicron variant will complicate central bank decision making. “[They are] weighing the danger of inflation on one side against the threats of unemployment, higher interest costs and sagging asset prices on the other. It is a difficult balancing act which will have huge implications for portfolios in 2022,” Mould said.

“Many commentators are now speculating that inflation will boost the fortunes of value-style stocks. 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” - Realindex Head of Investments David Walsh

 

This uncertainty could mean another switch to value stocks away from high growth, including tech firms. “Many commentators are now speculating that inflation will boost the fortunes of value-style stocks. 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,” says David Walsh, head of investments at Realindex.

 

Logistics

The global supply chain bottleneck has been a huge factor in the rise of inflation this year, as well as causing production delays for semiconductor-hungry industries such as car manufacturing and consumer electronics.

COVID-related factory closures in Vietnam and Indonesia has also impacted major clothing stocks such as Nike [NKE] and Lululemon [LULU].

The squeeze is expected to continue into 2022, which means businesses may need to consider new strategies such as near shoring or onshoring to secure and strengthen supplies and stock levels. This could lead to more opportunities for innovative logistics and warehousing stocks which can guarantee secure supply through technology such as blockchain, robotics or automation. 3D printing stocks could also benefit as they help to cut transit times. Continued growth in e-commerce should also strengthen the logistics sector.

Other major themes to look at in 2022 include whether the adoption of cryptocurrencies such as Bitcoin (or Elon Musk’s favourite, Dogecoin) will continue to grow despite regulation fears; economic growth in China and what an Evergrande [3333] collapse and further government-led regulatory crackdowns could mean for the economy; green investing in things like electric vehicles, plus demand for things like wind and solar energy, lithium and uranium will likely pick up as the world tries to hit net-zero carbon emissions targets.