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What are the big themes for 2022?

The Big Picture: Key Themes for 2022 DEBT PROLIFERATION. ... BUT NO DEBT IMPLOSION. ... INFLATION GENIE OUT OF THE BOTTLE. ... GREENFLATION PARADOX. ... AN EMERGING MARKETS COMEBACK. ... CHINA 3.0. ... A SILICON CURTAIN DESCENDS. ... STRATEGIC INVESTMENTS. More items...

morganstanley.com - The Big Picture: Key Themes for 2022 - Morgan Stanley

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Green building projects will raise demand for “dirty metals” and fossil fuel. Green politics will cut supply, inflating the cost of building a cleaner economy. The harder policymakers try to bring forward the shift away from fossil fuels, the less oil and gas exploration will take place, and oil price will need to be higher until the transition is well advanced, and that can take many years. The curbs on Russian energy exports have seen rising oil prices and increased calls to expand domestic production. Governments are more focused on alleviating near-term price shocks but the long term trend is to cut reliance on fossil fuels. Both the demand and supply side dynamics in several commodities are supportive of a multi year boom in commodity prices.

5. AN EMERGING MARKETS COMEBACK

Every decade one investment theme captures the attention of investors. The 2010s was dominated by large tech companies in the U.S. as the U.S. emerged from the Global Financial Crisis with a deleveraged economy, a cheap dollar and very attractive overall asset valuations. Emerging markets (EM) have fallen off the radar after the worst decade for emerging stock market returns since the 1930s8 —and to makes matters worse, EM equities had another disappointing year in 2021. The MSCI Emerging Markets Index declined -2.3%, underperforming the MSCI World Index by 25%, due to a number of factors including: an economic slowdown driven by policy tightening, a regulatory crackdown in China, inflation overhang, dollar strength, EM currency weakness and COVID-19 shocks.9 Several critical catalysts, however, should turn the macro environment positive for the EM asset class this decade. We expect a comeback for select EM equities over the next few years driven by a post-pandemic recovery, pandemic-inspired reform, manufacturing, ongoing strength in commodities and the digital revolution. Asset class valuations are at very attractive levels, with equities at nearly a 50% discount based on composite metrics.10

6. CHINA 3.0

China’s old economy is slowing, weighed down by depopulation, declining productivity, high debt and the hollowing out of manufacturing industries. Going forward, growth will come increasingly from the next generation of the new, “hard tech” driven economy. In the 2010s, China’s new economy was rising on consumer internet service giants that offered shopping, entertainment, mobile banking and the like. We believe the next turn will be to science based industries like semiconductors, artificial intelligence, quantum computing, biotech and high-end manufacturing. Xi is pushing for self-reliance in tech, meaning in particular less reliance on the U.S. in order to localize supply chains. His drive to make China carbon neutral signals deeper investment in sectors such as electronic vehicles and renewable energy. If the 2000s saw the last surge of the Old China, and the 2010s the rise of New China, the 2020s will be the decade of China 3.0—an even more deeply digitizing economy.

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7. A SILICON CURTAIN DESCENDS

For the past decade, nations have erected barriers to slow the flow of people, trade and even money. Data has been the one exception. According to Ericsson, mobile data traffic in the third quarter of 2021 alone exceeded all the mobile traffic before 2017.11 In the U.S. and Europe, it is the regulators who are trying to rein in the tech giants and even the playing fields. Other countries are filtering data, and blocking it from crossing borders, creating the “Silicon Curtain.” Data localization requirements now act as non-tariff barriers to digital services trade and could reduce the efficiency of digital data trade. Techno-nationalism is on the rise where countries are viewing private-sector technological developments through the lens of national security. Russia’s invasion of Ukraine is likely to accelerate the fragmentation of the global economy—to include financial systems, beyond the traded goods system.

8. STRATEGIC INVESTMENTS

We could witness a renewed capital expenditure cycle in several parts of the world to deal with global warming and geopolitical challenges. The realization that a net zero world path is not easy will lead to investments to meet the goals of energy security and expanding alternative supplies. For economic resilience, countries will focus on onshoring some productive capacity; insulating supply chains from geopolitical risk; and building inventories of important commodities and goods. The world of Just-in-time Management may be structurally changing. There is a need to increase defense spending especially in Europe and substitution of capital for labor could become necessary as faster wage growth will encourage higher labor-replacing investment. After 75 years of austerity in Germany, the tide may be turning. The pandemic saw Germany accept aggressive fiscal stimulus and debt mutualization within the EU. Recent EU bonds are a step in the direction to support these investments.

9. RETURN OF THE MATERIAL WORLD

In the 2000s the world was overinvested in commodities and underinvested in technology. In the 2010s decade that trend reversed.12 Now a turn towards the commodities is underway. Despite the hype for the intangible economy, the rise in prices in the physical economy—land, cars, raw materials and human labor—tells a different story. A housing deficit has seen home prices rise 14% last year in Organisation for Economic Co-operation and Development (OECD) countries, the highest since 1980 (Display 4).13

morganstanley.com - The Big Picture: Key Themes for 2022 - Morgan Stanley

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