What changes are in store for 2022?

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What changes are in store for 2022?
Credit: Pixabay

The spread of technology

When is a technology company not a technology company? Ask most people to list the five largest US information technology companies and they will come up with some combination of Apple, Amazon, Facebook, Google, and Microsoft. Perhaps with Tesla thrown in? However, many of these are not really 'information technology' companies.

Facebook and Google are ‘communications services’ businesses, as are Netflix and Twitter. Amazon and Tesla are in the ‘consumer discretionary’ sector. Technology is enabling their business, but they are not selling technology.

These sector definitions were developed in 1999, when the world was only just getting to grips with the potential of information technology. Today, the lines between the users of technology and those that create technology are increasingly blurred. Technology is involved in pretty much every business going, so labelling a business as a tech company is not necessarily helpful. Is it a sales software company or a semiconductor manufacturer? A virtual healthcare provider or a financial payments system? A smartphone maker or a social network?

Technology is creeping into more and more sectors, exerting its disruptive influence. As such, talking generally about technology will not cut it for much longer. The next decade might see the market sector disappear. Instead, it will be embedded at the heart of every other sector.

China: in or out?

Most investors are aware of the growing presence of China on the world economic stage. At the same time, it has built a thriving and innovative corporate sector, particularly in areas such as social media and green energy. Many investors will want a piece of this particular pie. However, the paths through which investors can invest in the world’s second largest economy may be narrowing.     

It used to be that the easy way to invest in China was through developed market companies with a Chinese presence: luxury goods manufacturers; car-makers; or hardware providers based in the US, Germany or Japan, but with a high proportion of Chinese revenues.

However, as tensions rise between the US and China, trading in China as a US company, or in the US as a Chinese company, is going to become very much more difficult. Anyone stuck in the middle will have to choose where to target their business model – serving two masters is unlikely to work.

Chinese demand is shifting to domestic businesses, helped explicitly by government policy. Companies in the region are building their own luxury brands and technology companies. The best access to the exciting consumer story in China – with 1.4bn Chinese citizens growing in wealth and purchasing power – is likely to be via the onshore equity markets in Shanghai, Shenzhen and newly launched Beijing.

However, these markets are risky. There is plenty of private investor involvement and they have a casino-like quality as a result, subject to wild swings. At the same time, the government’s goal of “common prosperity” has seen it wipe out whole industries with a couple of regulatory initiatives. Geopolitical belligerence and human rights issues add a further moral dilemma. Shareholder rights are routinely ignored, particularly for foreign investors.

As such, investors face an uncomfortable dilemma: embrace investing in China, for all its perils, or ignore the most significant economic force of the next two decades. This is not an easy choice, but avoiding short-term pain in Chinese equities is likely to be the big mistake in the long-term. It may be a case of simply accepting that it will be a wild ride.

Changing inflation expectations

Older generations can remember the grim reality of inflation in the 1970s and 1980s. They will have seen first-hand its power to erode spending power, to destroy wealth and to hurt corporate profitability. They will also remember the social pain of tackling inflation, with interest rates hitting 17 per cent in 1979.

For subsequent generations, inflation has been a non-issue. A confluence of factors, including technological progress, globalisation, demographics and the rise of Chinese manufacturing, has ensured that the inflationary genie has remained firmly in its bottle. While investors understand the risks of inflation, it is not something anyone under 50 has had to experience or plan for.

That may be changing. The factors that have kept inflation suppressed are shifting: China is becoming more isolationist, the demographic impetus is slowing, reshoring and shorter-supply chains are raising the cost of goods. This could be a shock: the people in charge have already shifted from those who understand inflation to those who have never lived through it (Rishi Sunak was born in 1980). Will they respond effectively to a different environment?

There is no need to panic on inflation. The current high levels of inflation are unlikely to be sustained. However, it may be structurally higher than in recent history. Savers have become increasingly aware that they need to preserve the purchasing power of their retirement pots, but this may become crucial as the environment changes.

Ben Kumar is a senior investment strategist at 7IM