As the new year approaches, so do the ‘new year business resolutions’ — and if one of your goals is to start or improve on your investments, then here are some strategies and opportunities to unlock for 2022.
In considering smart investment strategies in 2022, a top level understanding of the Australian economic backdrop or ‘investor context’ is a good starting point.
Recovery in the Australian economy from the Delta outbreak is underway, according to the recent Statement on Monetary Policy issued by the Reserve Bank of Australia (RBA). The RBA also sees conditions are ripe for sustained global economic recovery. This is critical for Australia, given our dependence on exports to sustain economic growth.
The vaccination rollout has laid the groundwork for a bounce back in domestic demand, to the point where for the 2021/22 year-average, GDP growth is forecast to be 3.25% and 5% for 2022-23, the RBA states. This is in sharp contrast to the contraction in economic activity in the September 2021 quarter, when NSW and Victoria faced hefty lockdowns.
Meanwhile the unemployment rate is forecast by the RBA to average just under 5% for the December 2021 quarter, before tightening to around 4% by December 2023. Higher fuel prices and increases in housing construction costs pushed inflation higher in the September quarter, although the RBA does anticipate ‘underlying inflation’ will moderate to around 2.5% by December 2023.
The RBA has pointed out that there is still some uncertainty around these ‘central scenario‘ forecasts, given COVID-19 is moving from its pandemic phase to the more ‘endemic’ chapter.
Higher vaccination rates may reduce COVID-related business uncertainty, boosting household confidence and supporting higher household consumption and stronger private investment. This scenario comes with some glimmer of hope for less unemployment and a stronger labour market, pushing inflation above current forecasts.
On the other hand, there’s still a risk of the emergence of a new virus variant or the waning efficacy of vaccines, which could turn the tides towards a weaker economic trajectory. This would depress consumer confidence, reducing household consumption as well as private investment. It could also deflate changes of a travel resurgence, weaken services trade and increase unemployment. If this is the 2022 scenario, then inflation could remain below 2% over the ensuing two or three years.
The current RBA Economic Outlook statement paints a relatively upbeat financial picture of the domestic economy. The statement refers to a pretty solid pipeline of public and private projects, including public engineering work, a record number of residential commencements in the June quarter and robust non-mining business investment trending higher into 2022. Meanwhile mining investment is forecast to increase slightly in the years ahead, as miners seek to sustain production at current high levels.
Public consumption, in the form of the National Disability Insurance Scheme and spending related to the ageing of the Australian population is increasing, while exports are expected to grow strongly over the next few years, as well as travel and education exports over 2022, as a result of the earlier-than-expected reopening of international borders. Higher rural exports, because of strong global demand and ongoing favourable weather conditions, have lifted wool and crop production and faster-than-expected herd rebuild.
Wages growth is forecast to strengthen to 3% by the end of 2023 — the fastest pace since 2013, as the unemployment rate approaches 4%. Furthermore, Governor Lowe stated in recent days that official interest rates are unlikely to rise in 2022 and the first increase may not be until 2024.
With all of this advice in mind, here’s a rundown of some of the best sectors and items to invest in for the year ahead.
Given the pandemic recovery and recalibration journey ahead, an investment strategy built around supportive macro-economic trends, combined with a focus on quality businesses, with conservative debt levels and proven management, paves the way for investment success.
If you have a clear understanding of the economic environment and sentiment for 2022 and invest in one or many of these points, next year should open exciting opportunities for investing.
Michael is the chief executive officer at investment services provider Kodari Securities (KOSEC) and a prominent expert on the stock market.
