The Omicron coronavirus variant that emerged in late November is a wake-up call for us that Covid-19 is not going to disappear soon and quality vaccines remain a key factor to mitigate its impacts. Before 2021 ends, let me share five key economic and investment trends that SCB CIO foresees in 2022.
First, the impacts of the pandemic are waning yet persisting. These lingering effects will likely be a smaller factor in the uneven economic recovery, compared with their impact in 2019 and 2020. Following a pronounced recovery in 2021, the momentum of developed economies will begin to slow down in 2022, while emerging economies will begin to recover.
However, it is expected that the recovery for each business sector will continue to be uneven, as some are still affected by restrictions such as those on international travel.
Second, monetary and fiscal policies will slowly tighten. It is likely that the US Federal Reserve will raise its policy interest rate three times in 2022, starting at mid-year, with ongoing communication to the market to keep volatility in global financial markets, although short-lived, in check. However, central banks in developing countries, especially those vulnerable to inflation and currency depreciation, such as Brazil and Turkey, may need to raise interest rates quickly.
FISCAL CHALLENGES
Meanwhile, the Bank of Thailand is likely to maintain its policy rate at 0.5% for another year to support the economic recovery. Fiscal policy in developed economies will begin to feature more revenue-boosting policies, such as tax hikes, but may not be enough to offset the large deficits caused by heavy pandemic support programmes, causing public debt to remain high.
Third, financial costs will start to rise with the value of the baht becoming stronger, yet more volatile, in the second half of 2022. Bond yields, particularly of developed economies, will tend to increase, yet slowly, in line with policy interest rate hikes.
The appreciation in the baht would track a rebound in foreign tourists and the current account balance. SCB CIO expects the baht exchange rate will remain in the range of 32-33 to the dollar by the end of 2022. Nonetheless, with adjustments of monetary policy in various countries and uncertainties concerning Covid mutations, the exchange rate is expected to fluctuate highly. Therefore, a foreign-exchange hedging strategy will be essential for those investing in foreign assets.
Fourth, investing in stocks is likely to outperform investing in bonds. Investors are advised to focus on highly immune countries and businesses growing well in distressed situations, where the impacts of Covid remain and bond yields slowly rise, such as US and European stocks, especially those with quality growth prospects.
The Vietnamese stock market continues to be the top pick for Asean, despite valuations starting to pick up. Going forward, we believe the Vietnamese economy and profits of Vietnamese listed companies will likely continue to recover with the recovering export sector.
SCB CIO maintains a neutral view on the Thai stock market due to its richer valuation, compared with that of Vietnam. Thailand's economic recovery and the return of foreign tourists are likely to occur in the second half of 2022.
To hedge against the risk of longer-than-expected high inflation, investors should consider investing in oil, financial and consumer sectors, while gold is likely to be adversely affected by the US Federal Reserve's monetary policy adjustments.
FIVE THEMES
Fifth, we foresee a greater role for thematic investment trends. In line with the economic recovery trend in each country, thematic investment funds in industries and companies with strong fundamentals and specialised businesses, including businesses that can follow the growth of future megatrends, will play a greater role in global asset allocation. In 2022, SCB CIO recommends five major investment themes:
Renewable energy and decarbonisation, such as renewable energy, electric vehicles and businesses related to energy management and carbon reduction. This is in line with future investment trends supporting the transition to using environmentally friendly energy.
Healthcare and healthtech, especially in the medical technology sector, such as medical devices, as healthcare and wellness expenditure continues to increase globally.
Fintech that embraces digital transformation and blockchain technology to offer investment opportunities in companies offering diverse financial services.
Metaverse plays featuring investment in the internet's next evolutionary step. Augmented reality technology will bring a variety of growth opportunities, not only limited to social media, but will also include business opportunities, related to video games and leisure, e-commerce and manufacturing.
Aerospace and space exploration focusing on the growing trend of aerospace and aviation businesses, space tourism, rocket technology, drones, satellites, climate measurement and forecasting, and advanced telecommunications.
Kampon Adireksombat, PhD, is first senior vice-president of SCB Chief Investment Office (SCB CIO)