Jan. 4, 2022
Predicting the future has always been a challenge, and it has become almost impossible with Omicron. That said, I’m optimistic things will considerably improve on the COVID-19 front in 2022, at least from the second quarter onward.
This belief is based on a mix of hope and science that there will be a high enough percentage of people who are fully vaccinated and/or been infected with the Omicron variant so that the tide will turn on this pandemic.
My belief certainly colours my 22 thoughts for 2022 below.
1) Interest rates will stay low. Yes, interest rates will likely rise from extremely low to very low in 2022, but don’t confuse rising rates with high rates. Act as though we are in a very low interest rate world.
2) Energy and metals likely have more room to run. Oil has been so unloved that the valuations on some big 2021 gainers remain super low. Many in the sector have forward price/earnings ratios in the seven range, which is much lower than their historical average and much lower than the overall market.
3) Canada should outperform global markets. This is based in part on having a very small percentage of high-growth/no-profit tech stocks, as well as an overweight to commodities.
4) Increased immigration should help lower wage inflation. This assumes COVID-19 doesn’t hold up this process for too long. More workers at all levels will reduce some of the wage inflation we are currently seeing.
5) Increased immigration should keep residential real estate prices up. Low interest rates, a steady economy and high immigration rates are the three-legged stool for increasing residential real estate prices. Prices went up even without the sizeable net immigration piece during the past two years. The immigration numbers should compensate for the slightly higher rates.
6) Cottage country real estate prices may slow down a little. I say may since it is very much COVID-19 related. As more people work from the office and more people are comfortable travelling internationally, I truly believe there will be a real slowdown on vacation property real estate in Canada. How long it will take to see those drops is the question.
7) Spending will grow. Many people have considerably dropped their spending levels in the past two years. If you kind of feel like you have lost two years of your life, you will try to make up for it — COVID-19 willing.
8) Your car will be more important. There will likely be a significant lag in the comfort level of going back to public transit as more people head back to the office. This will lead to more money being spent on cars, and likely more traffic jams.
9) Your house will be less important. Of course, this is all relative, but we will likely be spending less time in our homes (although it doesn’t feel like it right now). This means more money for concerts, restaurants, travel and experiences, and less for home gyms, swimming pools and gazebos.
10) Living life can mean indulging in things that aren’t so good for you : alcohol, drugs, tobacco, sex, gambling, etc. Sin stocks may do well as the return to living (and spending) has to go somewhere.
11) Fitness and wellness may slip in importance. This isn’t to suggest there are any major negatives in these areas, which have experienced sizable growth over the past few years, but it is somewhat the corollary of thought No. 10.
12) Online shopping and food delivery are here for good, but not with the same buzz. The stock market is forward looking and is always looking at momentum. I believe some of the momentum in this area will decline.
13) Build back better … sort of. There remain some aggressive infrastructure projects and spending that will happen, but it will likely end up being Build Back Better Junior Edition if the United States is any example.
14) Taxes may not be headed higher . There is a clear rationale to raise taxes to help get us out of the huge debt situation, but there are two things in the way. The first is the belief we can grow ourselves out of debt, which may be partially true. The second is the current government is much more comfortable giving money away than asking for more.
15) Demand for mortgages and home equity lines of credit will continue to grow . Even with some increase in rates, the only thing that will stop this area of growth is a flattening or decline in real estate values. This can certainly happen, but it likely won’t be this year.
16) Rent costs will rise . As residential real estate values rise and interest costs rise, the desire among landlords to boost rental rates will be very high. Lack of overall supply will simply make this worse.
17) Retirement residences will still manage to grow. There is no question the pandemic has increased the desire for many seniors to stay at home. Yet with older baby boomers now clearly in this market, the costs of staying home increasing, and the lottery ticket of housing values waiting to be cashed in for many, don’t be surprised if this market continues to grow — in some cases with the ability to buy as opposed to rent.
18) Cryptocurrencies will exist. I know this is a cop-out thought, but the only thing I know for certain is that governments are going to significantly increase the regulation and taxation of this space. Beyond that, I won’t predict anything.
19) Investment fundamentals will return. Something is broken when the IPO of Rivian Automotive Inc., an electric car company with no sales, values it at more than three times that of Honda Motor Co. Ltd. In a world of uncertainty, there will be greater value placed on actual profits and dividends, and less on the companies priced for perfection five years out.
20) Bonds will still struggle. This asset class is broad enough to find some winners, but the core vanilla bond space will find it hard to deliver returns with a combination of low yields and rising interest rates.
21) Inflation is here to stay … for now. I don’t want to use the word “transient” here, but at some point later in the year, inflation will pull back to the range of two to three per cent. This is largely because inflation is measured year over year, and it will be much harder to see five-per-cent inflation rates when compared to the fourth quarter of 2021. The other factor is we just don’t grow that much. In the past 13 years, the highest annual GDP growth number prior to 2021 was 3.15 per cent. It is hard to sustain very high inflation numbers with GDP growth so low.
22) The search for investment yield will grow. Many investors like the steady income from an investment portfolio, but there will be an increasing focus on staying ahead of inflation and taxes. This will likely put even more of a premium on investments that can deliver this type of yield.