Regarding stocks and shares, two general themes fill the headlines as we leave 2021. The first is the exponential growth of the Omicron variant of Covid-19. And the second is the rise of general price inflation.
2021’s correction by stealth
But stock markets look ahead. So both those known factors are likely to be already baked into stock prices. And we’ve seen quite a large correction in many share prices during 2021. There hasn’t been a crash in the main indices, such as the FTSE 100. But some investors will have seen one in their own stock portfolios.
In many cases, 2021 has been characterised by plunging share prices. And that’s a striking difference compared to the way stocks roared upwards in 2020 from the bottom of the spring coronavirus crash. And that’s why some people have labelled the recent action a stealth correction — index watchers might have missed it.
For 2022, in terms of stocks, I’m not stressing too much about Omicron. I reckon science will likely prevail over the disease and its variants in the end. Vaccines and treatments keep evolving and they keep coming. And it’s difficult for me to imagine Covid-19 ever causing a lockdown of economic activity with the severity of the first one we had in 2020. However I could, of course, be wrong in my assessment of the situation.
The inflation problem is tricky. I’m not hearing the word ‘transient’ much these days. And the problem looks like it will be with us for some time. So it’s tempting to allow my mind to spin-off into all kinds of scary thoughts about rampant 70s-style price increases and exploding interest rates.
Many businesses can thrive, despite inflation
But the economic framework of the 2020s is unlike that of the 1970s. The UK’s base bank interest rate is at 0.25%, as I write — not far up from its 0.1% nadir and the lowest it has ever been. And the base rate is one of the main tools the UK government can use to try to control inflation. Raising it tends to affect how much people spend and therefore how much things cost because of the laws of supply and demand. In other words, if demand is suppressed, prices tend to fall to attract it back. And that process tends to reduce inflation.
Meanwhile, the government aims to keep inflation at 2% rather than November’s Consumer Prices Index (CPI) figure near 5%. And many observers expect the Bank of England to raise the base rate further to help fight inflation if it persists.
But many businesses can continue to thrive despite higher inflation. Warren Buffett said the most important qualities they need are pricing power and low capital intensity. So I’m watching defensive stocks rather than cyclicals for 2022.
My list has names such as Unilever, Diageo, Imperial Brands, British American Tobacco, Britvic, Sage, GlaxoSmithKline, AstraZeneca and others. However, positive investment outcomes aren’t certain just because I like them now. All shares carry risks.
Nevertheless, I’m watching them and poised to buy the stocks at opportune moments. They are some of my best share ideas for 2022 and beyond.
