Founder and CEO of FarmTogether
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Last year was another unpredictable year for the economy.
Record-low interest rates, major supply chain disruptions, lingering pandemic consequences, climate change in action, Bitcoin’s all-time high — to name a few.
These factors and more have changed the way the world is investing. Here are the three major investing trends I expect we’ll see throughout 2022.
Covid-19’s Lingering Impact On Portfolios
There are a number of ways the pandemic may continue to impact investment portfolios this year. Monetary policy is expected to continue to retract as the Federal Open Market Committee has already begun tapering the pace of its asset purchases. Meanwhile, the Federal Reserve is preparing to raise interest rates as early as March, though policymakers have been divided on when rate increases should occur.
Global supply chain issues aren't likely to be resolved anytime soon. On the ground, the U.S. faced a massive employment shortage of 80,000 truck drivers earlier this fall. On the seas, more than 20 million shipping containers laid idle in ports around the world, causing severe delays in delivery. With median freight prices quadrupling (subscription required) in July 2021 compared to 2020, major retailers have begun chartering their own supply ships — putting smaller companies at a severe shipping disadvantage.
Due to the shipping crisis, prices on certain consumer products are expected to increase by more than 10% this year. Equity prices for semiconductor manufacturers and consumer retailers have been unfavorably impacted by shipping pressures. With prices for energy, food, cars, and health care continuing to increase, annual inflation rose 7% in December, a nearly 40-year high.
In light of these events, investors have already begun preparing their portfolios and setting expectations for what’s to come. Demand for safe-haven assets is on the rise while cash inflow into Treasury Inflation-Protected Securities hit record highs last year. The 18 ETFs with “inflation” in their name or description have all had positive cash inflows this year and combined for over $35 billion of new cash in 2021.
Investors Continue To Embrace Alternative Investments
Asset allocations will likely continue to evolve for several reasons.
First, equity markets continue to be undesirably volatile. The stock market began seeing heavier volatility in October, while the Chicago Board Options Exchange’s CBOE Volatility Index (VIX) rose 35% in December. With 64% of investors surveyed recently noting they fear market volatility, stable alternative assets will likely continue to garner growing consideration.
Second, the speculative equity bubble continues to grow, creating systematic market risk. Stock prices have never been more expensive in relation to national GDP while the S&P 500’s 10-year P/E ratio has been hovering around 39 — twice as high as its modern-era average valuation. With record-breaking stock prices, investors have begun to diversify away from major tech stocks. Further, a CNBC survey of financial executives revealed 76% believe it is time to be very conservative in the stock market.
With investors looking for different places to invest, many have turned to alternative assets.
Today, one in six adults have now invested in cryptocurrency, while one analysis of a subsection of equity crowdfunding investments showed growth of 80% quarter-over-quarter to start the year. This growth is only expected to continue; the total alternative assets under management are forecasted to exceed $17 trillion by 2025.
This growth is largely driven by advancements in financial technology. Digital investment platforms now circumnavigate high direct investment minimums by pooling smaller contributions into funds that represent an aggregated ownership interest.
Tokenization has also modernized how assets are offered by breaking an investment into digital digestible pieces more manageable for smaller investors. In December, a decentralized autonomous organization (DAO) attempted to purchase a copy of the United States Constitution.
ESG Allocations Will Continue To Increase
2021 was one of the warmest years on record and the world continues to witness extreme weather events amplified by a warming climate. Meanwhile, the long-term environmental impact of mask, glove and chemical disinfectant use during the pandemic also remains to be seen.
The good news: The pandemic accelerated global attention on climate. World leaders continue to collaborate to drive international efforts against climate change, while many people are now more aware of how their actions impact the environment.
This renewed interest in ESG also translates to investment decisions. During 2020, 77% of wealth funds, insurers, foundations and pension funds surveyed increased their ESG investments in response to Covid-19, while another survey showed 85% of company executives respondents saw the pandemic as “a wake-up call” on sustainability. Retail investors continue to show strong interest in sustainable investing; a recent survey found the most important driver is not investment returns but a positive impact on the environment.
This interest in sustainable investments should remain strong in 2022 and beyond, largely driven by ESG’s outstanding investment performance. Eighty-three percent of global investors surveyed say ESG-integrated portfolios are likely to do as well or better than non-ESG-integrated portfolios. Socially responsible companies are shown to be less likely to go bankrupt and were more resilient during the beginning of the 2020 recession. In one study, ESG investments appeared to be less volatile and were more capable of generating higher risk-adjusted returns.
ESG is also poised to become more mainstream as the new investment opportunities continue to grow. At the end of 2020, there were 552 ESG ETFs; at the end of October 2021, there were 834. From January 2021 to September 2021, net cash flows into ESG mutual funds and ETFs were higher than all of the cash flow from 2020.
A New Year With New Opportunities
The pandemic taught everyone that no one knows what the future has in store. 2021 was an incredibly unpredictable year, but there’s already signs of optimism in 2022. Though pandemic-related issues will continue to linger this year, these impacts will drive investors to new asset classes and new ways to drive impact.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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