2022’s Emerging Macro Trend: Focus on Micro

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A man has a swollen nose while testing for COVID-19 at a roadside testing booth in New York

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About the Author: Christopher Smart Chief global strategist and head of the Barings Investment Institute, and a former senior economic policy officer at the US Treasury and the White House.

I hate January.

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It’s not short days or freezing rain or postholiday blues. But if you’re into financials”strategy“Sports As I Am, Expectations Are Skyrocketing. It’s when you find yourself making ridiculously accurate predictions about the Russell 3000 Value Index or prudently considering humanity’s prospects if the world order goes unchecked, You should earn your maintenance.

The first is too specific for anyone to take the guesswork seriously; The second is too broad for any of the answers to be meaningful. And as recovery continues, macroeconomic changes this year will be far less dramatic than the Covid shocks and policy responses in the past two. This means that investment returns will depend more on choosing the right parts of the right companies’ capital structure than trying to predict the rate hike or oil price.

Even for someone who does macros for a living, this is shaping up to be the year of micro choices.

New forms of COVID are likely to emerge during 2022, but we will manage them better. The Fed will tighten a few times, but will still err on the side of looser policy as inflationary pressures ease. The world’s richest governments will cut short deficits, but still spend generously. China will slow down, but officials will ensure economic health as the National Congress of the Communist Party of China convenes. Most Emerging Markets, At Least Where Their Leaders Don’t Ignore the Laws of Economics, should ultimately benefit from vaccines and global trade reform.

Will US Shares Give Another 27%? is unlikely. Will copper grow 25% again (on top of 26% a year ago)? highly unlikely. Will the Baltic Dry Index of commodity freight rates rise 62% amid a supply chain crisis? Almost certainly not.

Real market action this year won’t come from big moves in the dollar or the Treasury or oil. The best investments will be in companies that appear resilient to the big trends that will shape profits over the next decade.

Even after increased support for the pandemic, government spending and debt are sure to rise amid pressure to address inequality and pay the costs of climate change. Knowledgeable firms will angle for ways to benefit from this increased fiscal leniency, be it tuition subsidies, bridge contracts, or electric vehicle charging stations. Truly smart management will be careful not to overstretch the balance sheet if rising government debt starts raising everyone’s borrowing costs.

The changing climate itself is shifting the relative prices of everything from food and land to energy and insurance. Of the $2 trillion in US natural disaster costs since 1980, a third have come in the last five years, The best investment targets would be firms that have their own climate strategies. This is much more than a commitment to a “net zero” emissions target; This means understanding how profit margins may expand or shrink over the next several years due to what is shaping up to be a broader rearrangement of economic activity.

Then there’s technology. It’s hard to name an area where the combined power of cheap data storage, mobile data networks and artificial intelligence won’t bring huge profits to companies that understand how to employ them. The industrial Internet is already providing productivity gains in manufacturing, while the disruption from decentralized ledgers is only coming into focus for global finance. It will be hard to pick winners, but the obvious losers are those who are not thinking carefully about these changes yet.

People are changing too. We are at the first moment in human history when The population over 64 outnumbers children under 5 years of age, This has implications for the balance of saving and investment, the productivity of workers and the mix of final demand. The pandemic has already brought significant changes to work and travel patterns, and an aging population will bring even more.

In the end, as always, global politics will matter, and rising tensions between the world’s two largest economies directly affect many bottom lines. Washington and Beijing will impose even more tariffs, regulations, sanctions and export controls on each other’s companies. There will be new opportunities as each country becomes more inbound, but any firm that has both supplier or customer jurisdiction will need a backup plan.

In the words of the great British philosopher the world is divided into “hedgehogs” and “foxes” Isaiah Berlin, Hedgehogs “know one thing” and see the world through a single defined idea, while foxes “know many things,” applying a variety of experiences as circumstances require. For those of us who like to think in terms of unified financial principles and elegant macroeconomic frameworks, the coming year is turning out to be a great time to fox.

Investing strategies for 2022 will require a lot of pencil sharpening and tire-kicking to examine individual business models for their ability to grow and thrive amidst these sweeping changes.

Such guest comments are written by writers outside of Barron’s and Marketwatch newsrooms. They reflect the perspective and views of the authors. Submit commentary proposals and other feedback [email protected],

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