In today’s Exponential Investor

  • A record-breaking New Year
  • Bond markets and green tech hotting up
  • Three themes for 2022, and one key risk to look out for

Happy New Year!

I just want to start by wishing you all the very best in 2022.

It was a peaceful Christmas period, with Omicron affecting most holiday and social plans, so I dug into a selection of excellent books, new and old (Putin’s People, Barbarian Days, The Upswing, Legacy, The Asian Financial Crisis, Safe Haven Investing, and The Innovator’s Dilemma… which will all keep me busy in the coming months…).

Covid of course played a central role for all of us… with plans cancelled or derailed, and scaled back all over. I hope you were able to see family for Christmas, and avoid any close contact with the virus.

But what was strangest as the old year turned into the new year made me think of this…

“What a morning! Warm, fragrant, balmy, yet with just that nip in the air that puts a fellow on his toes. The yeast of spring is fermenting in my veins, and I am ready for anything.”

So wrote P.G. Wodehouse in one of his many unsurpassable works, Uncle Fred in the Springtime.

But these were the kind of thoughts floating through my head on New Year’s Eve and Day, which at 16.3 degrees Celsius was the warmest on record for those days for parts of the UK.

The unseasonal weather reminded me of one of my favourite Donald Trump quotes (remember him?) from January 2019.

Confusing weather and climate, he wrote, “In the East, it could be the COLDEST New Year’s Eve on record.” He followed that up by hoping for “a little bit of that good old global warming”.

This followed previous exclamations, like, “Brutal and Extended Cold Blast could shatter ALL RECORDS – Whatever happened to Global Warming??”

This is obviously silly. Weather isn’t climate, and global warming/climate change make weather more volatile and extreme in all directions.

But we must now come to expect this kind of weather. The reality of climate change is now present. Though a warm New Year’s Eve doesn’t worry Londoners, the effects are much starker and more damaging in more extreme climates, and poorer countries.

The realities of climate change will become a powerful driving force for policy and investment decisions, as this reality becomes uncomfortably unavoidable.

Green stocks heating up

In the meantime, stocks in the green technology and energy sectors have been pushing upwards. Various funds covering the sector were up over 5% in the last few days, while plenty of individual stocks saw 10% and 20% single-day gains.

This was remarkable – as the general expectation is that higher bond yields are a threat to technology and growth stocks, which includes many of those in the clean tech space. However, there are always a number of factors at play.

Over the past few days, bond yields, especially in the US, have risen sharply. Bond yields rise when investors sell bonds – which, broadly speaking, reflects a desire for greater risk taking, as some of those funds will be used to buy riskier securities like equities.

The higher bond yields which result from this are themselves a threat to equity valuations. But this time, there is no obvious reason for the rising bond yields that didn’t already exist, as former central banker Mohammed El-Erian noted on Twitter.

American ten-year bond yields (US10Y) are now up to 1.65% having previously fallen back to below 1.2%, so this is a pretty significant move in the last couple of months. If it goes higher than the 1.75% peak it reached early last year, that would constitute a meaningful signal.

It would probably reflect greater fear of inflation, a greater sense that central banks will roll back their monetary stimulus and raise interest rates, all three of which are likely to be negative for equity markets – even before factoring in the implications of higher bond yields themselves.

So the heat is rising in more than a few ways. We are seeing more record temperature days, more surprising weather patterns, and some heat in markets, too.

2022: themes and risks

Looking forward then, here are three things to keep an eye on as this year gets underway. They’re similar to the big themes from the back end of last year:

  • Rising bond yields
  • How stocks, tech and growth stocks in particular, respond to the bond market
  • Inflation.

We now see that inflation is persisting, rather than transitory. Its trajectory is the great question of our day. We’ve spent two years of talking about little else, and it must remain front and centre for every investor.

It will be a key factor determining the direction of bond yields, and thus stocks.

And there’s another risk to pay attention to, and that is, once more, Covid.

Here in the UK, our current Covid restrictions aren’t too egregious. And I would be surprised to see Omicron lead to widespread lockdowns in the US. But perhaps our gaze should focus on the risks in Asia instead.

China is dealing with its first major outbreak of the virus in quite some time, while its economy slows, and its property market implodes.

The Evergrande situation is by no means over, it rumbles on, infecting more and more companies in the Chinese property sector, as house prices drop and lending dries up. It’s familiar story.

Meanwhile, growth is slowing and Chinese President Xi Jinping is coming under political pressure off the back of this.

China has long been the engine of global growth – and no more so than in the wake of the pandemic.

Its response to the latest wave of Covid, and the resulting impact on its economic activity and the property sector especially, will be crucial things to watch for investors in the early parts of 2022.

Here at Exponential Investor, as always, Sam and I will be keeping a close eye on the biggest opportunities and risks for investors in these fascinating times.

I hope your year has started well, and that you’ll be joining us as we find our way through these first few months of 2022.

Best wishes,

Kit Winder
Co-editor, Exponential Investor