Turning the Page: How 2022 Might Be a New Chapter for Capital Markets

In this week’s edition, Franklin Templeton Investment Institute reveals its picks for the biggest surprises in 2022 within capital markets, public policy and macroeconomics. In each case we not only stick our necks out, but also offer a yardstick for measuring whether we got it right.

Our purpose is twofold. First, we believe that out-of-the box thinking spurs creativity. If we can ponder the implausible, perhaps in some small way that makes us better at judging the likelihood of all sorts of outcomes that matter for our clients and their portfolios. Second, it is important to have a bit of fun. What better time to go out on a limb than on the eve of festive holidays, when we contemplate the year just past and eagerly anticipate the one to come.

Before we offer our chosen surprises, it might be good to consider events in 2021 that surprised most of us, irrespective of whether we engaged in this exercise a year ago.

Did anyone predict that inflation rates would hit their highest levels in four decades? Or that COVID-19 would still dominate the conversation, forcing us to learn the Greek alphabet soup of variants? How many of us had the word “transitory” in our regular vocabulary prior to 2021? Or that supply chain issues would last so long that Christmas gifts might be delayed? Would anyone have expected that some form of the Build Back Better infrastructure bill would not pass through Congress in 2021? And lastly, that despite a rebounding economy and employers actively looking for workers, the labor participation rate would significantly decline?   

To quote the great philosopher Yogi Berra, “It's tough to make predictions, especially about the future.” And to quote our compliance team, this exercise is not intended to be any form of investment advice or recommendation, and there is no assurance that any estimate, forecast or projection will be realized. Now, with that said, here’s our 2022 list:

1.     Electric electrifies. Next year could prove the tipping point for electric, as in electric vehicles, batteries, solar panels, wind farms and a push to modernize the electric grid. Yes, in putting this surprise first, we are joining a wave. However, thus far it is akin to a low-tide ripple rather than a surging tsunami. Courtesy of tax incentives and major infrastructure spending, no-emissions electricity will take off like a billionaire’s rocket. When historians write the history of 21st century energy transformation, we wager that the ‘20s were the decade when hope turned into reality. Here’s the marker: Global electric vehicle (EV) sales by the end of 2022 will exceed global total light vehicle sales of one of the industry behemoths, General Motors.

2.     “Noflation.” Often, just when the received wisdom shifts, is precisely when it is least wise to do so. In December, Federal Reserve (Fed) Chairman Jerome Powell threw in the towel on “transitory,” signaling that the Fed no longer has confidence that the 2021 surge in prices and wages will soon be over. Almost as if on cue, crude oil prices slumped. Lower oil prices reflect some easing of OPEC production and a coming surge in North American production rather than fears of weaker growth. With Omicron seemingly less lethal than its Greek letter brethren, US growth is actually accelerating, as evidenced by a surging Atlanta Fed GDP-Now index. With oil prices wobbling, can gasoline, transportation and food prices be far behind? The latest evidence also suggests that more Americans are looking for work, perhaps enticed by higher wages. If so, wage inflation might also slow. Receding inflation risk and resilient growth will work like a charm for asset prices, so “noflation” only applies to ordinary goods, services and wages, not to stock market or house prices. Here’s the marker—US core personal consumption expenditures (PCE) inflation finishes 2022 at 2.5% year-on-year.

3.     ESG, ESG! The world going electric is consistent with the world going responsible, as in investing along environmental, social, and (good) governance lines (ESG). Even with the delays in passage of the Build Back Better legislation in the US, which includes wide ranging policies geared towards achieving climate change goals, we still expect some version to pass in 2022. Exact figures on the size of ESG investing are difficult to come by, given different yardsticks for environmental, sustainable, social and governance criteria. But according to the Global Sustainable Investment Alliance (GSIA),[1] some US$35 trillion is already managed in a “sustainable” fashion, including about one third of US financial assets. Momentum is only growing, as concerns about climate change, social and ethical responsibility grow. For this measure, we believe that the proportion of US sustainable assets under management will rise from about one third to over 40% in the next 12 months, as defined by GSIA.

4.     A bubbly 2022. How about a 20% total return in global equities? We do not think it is out of the question. If China stimulates (and all signs point in that direction), inflation cools and the Fed only gradually “adjusts,” and if calamities such as renewed virulent COVID outbreaks or global strife can be avoided, what else can match the appeal of equities? Even with S&P 500 earnings per share only expected to rise about 7% next year[2] and elevated US equity valuations, segments of the market could benefit. Steepen the Treasury yield curve and financials could fly. Improve growth visibility by curbing the pandemic and inflation fears and cyclicals, small capitalization and value stocks could race ahead. Cool the rhetoric between China and everyone, ease global supply constraints and welcome a more expansionary German fiscal policy and, erstwhile market laggards in China, the rest of developing Asia, Latin America and Western Europe could make up for decade’s worth of lost ground to US markets. And in a world of stable growth, receding inflation and supportive monetary and fiscal policy, what is the alternative to stocks? Surely not fixed income! Our metric: the total market capitalization of the global stock market on December 31, 2022 will be 20% higher than on January 1, 2022.[3]

5.     Warren bests Elon. No, this is not about Warren Buffett overtaking Elon Musk as the world’s richest man. No, Warren bests Elon when it comes to cryptocurrencies. Warren Buffett and his venerable sidekick Charlie Munger waste few opportunities to trash Bitcoin and other cryptocurrencies. Elon Musk is characteristically all over the map—one day tweeting support, another casting doubt. But let’s call him a crypto fan. So, here’s our measure. On December 31, 2022, the total market capitalization of the cryptocurrency market will be 20% lower than on January 1, 2022[4].

So, those are our out-of-the-box thoughts for what may happen in 2022. We had fun putting these together and hope you have fun reading them. Next year, we will explore many of these topics in more detail, as well as key themes that impact the financial markets. We wish you and your family a happy holiday season, and we look forward to hearing from you in the new year.

To uncover what our investment leaders are watching for in global markets for the year ahead, read the collection of our 2022 outlooks.

US: 2022 Outlooks

Global: 2022 Outlooks

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[1] NATIXIS. Latest edition of the Global Sustainable Investment Review confirms strong growth of ESG assets all over the world. July 2021.

[2]Based on the MSCI US index, sourced from Factset and MSCI as of December 2021.

[3] Total market capitalization of the global stock market measured by the total value of the MSCI ACWI Index, calculated using information on total supply of equities and pricing data.

[4] Total market capitalization of the cryptocurrency market as measured by the Maha-CoinGecko Digital Asset Index that aggregates price and total circulating supply across all cryptocurrency exchanges.