How I am navigating the 2022 Equity Markets

Summary of 2022:

As it has always been, I still favor risk-on assets (such as stocks and crypto) over risk-free bonds and cash. This is because of the slackening but still, above-trend growth will continue to support risk-on assets going forward. But looking forward, I am expecting the outperformance of equities relative to bonds to lessen compared to 2021.

This means I do not expect returns like to happen again this year:

Why do I think so?

Ample liquidity injected into the system and historically low (albeit rising) interest rates are two other factors that support risk sentiment in general.

About Inflation

The current high levels of inflation are going to decline in the first half of 2022, and are anticipated to continue in 2023, amidst goods/ services rebalancing and as productivity gains continue to neutralize cost increases.

The Fed has started tapering its Quantitative Easing (QE) program in November 2021 and is anticipated to taper off to zero by the end of March 2022. Meanwhile, the latest December dot-plot showed 3 hikes for 2022, and investors are awaiting the first hike to come as early as April 2022.

Threats to look out for:

The top threat to watch out for in 2022 is the possible policy slipups by excessively aggressive normalization. Secondly, the reoccurring waves of Covidnew variants is clearly another threat. increasing geopolitical tensions, between US and China on various fronts, and between Europe/ US and Russia on Ukraine, could also agitate market performance in 2022.

Cash is now Trash

Above-trend growth among major developed economies is anticipated to continue in at least the first half of 2022 which supports the earnings growth momentum. I continue to consistently invest in risk-on assets by leaning further in favour of US and developed market (DM) equities. Due to the accelerated tightening from the Fed, China’s regulatory recalibration and economic slowdown, and the possibility of stronger dollar driving outflows from EM markets are the vital factors for my lower bullish view on EM equities.

I would personally continue to invest and put focus into individual stock picks in the US Markets and other Developed Markets. Emerging Markets remains a hold for me and I will continue to hold funds within China and the rest of EM.

With strong free cash flow generated by businesses coupled with low corporate downgrades and defaults, returns from bonds would still not be optimistic. In a rising rates environment, the price performance of some of these bonds might suffer as I don't anticipate material tightening of credit spread from the current level I will, however, prefer Asian credit over US credit given the credit spread premium from Asian counterparts, especially against the backdrop of diverging monetary policy by critical central banks in the West versus in the East.

I will continue to contribute to CPF regularly for a bond-esque approach to achieve both tax savings and lower-risk returns.

The Fed's new pivot to concentrate on fighting inflation expectations would mean interest rates will move sharply, causing the yield curve to flatten.

I would continue to still hold minimal cash and a young investor, preferably just 6 months emergency funds, with 2-3 months located in cash management accounts.

Portfolio Management Ideas

With the theme of 2022 being a year of transition, I will continue to look into value-based stocks and reduce exposure AND attention in growth-based companies (especially the loss-making companies)

Some examples of value-based companies I am increasing my attention in:

Microsoft (MSFT), Alphabet (GOOG), Amazon.com Inc (AMZN)

Continue to focus on the long term and find high-return businesses with superior management teams with track records of adapting or innovating to remain market leaders in their industry.

Meanwhile, I am still observing potential multi-baggers as over longer time periods, growth stocks still carry a wide advantage over value stocks.

An additional point to take note of is that recent underperformance was driven largely by profit-taking rather than any fundamental problem with the companies I am looking at. So what I am taking note of is to invest in some of the most forward-thinking and innovative companies which have significant pricing power, helping to provide protection against inflation.

Some examples of growth-based companies I am maintaining my attention in:

Shopify (SHOP), Tesla (TSLA), NVIDIA (NVDA).

Long Term Approach to Investing.

Moving forward is when investing gets difficult, we should be expecting a more volatile, less "everything goes up" kind of environment within the stock market.

The important thing is that even the best long-term investments go through periods where their shares are out of favor with the market for any number of reasons – one must have the discipline to look through this. The route to long-term wealth creation is the patient ownership of companies that have the potential to grow at attractive rates for many years.

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Ngooi