We’re starting the new year, by revealing our predictions for 2022, just as we did last year.
These predictions are not supposed to represent our base case scenarios for the year, but rather promote thoughtful conversation on a range of topics that we may face in 2022.
Each member from the Oracle Investment Management team has contributed two predictions.
International Travel Will Return to Pre-COVID Levels (Almost)
Despite the threat of Omicron lingering worldwide, we predict international travel will start to pick up by the middle of the year for Australians and almost return to normal levels by the end of the year. Once the Northern Hemisphere gets through their winter the world will learn to live with COVID and continue its return to normalcy.
Alan Joyce the Qantas CEO stated, “Qantas are planning to have their full fleet in the air by July 2022.” If this all goes to plan, we predict international flight levels globally to be at or above 80% compared to pre-COVID levels by the end of the year.
With high vaccination rates worldwide and the Omicron variant not looking as severe (despite its high transmissibility), we may be able to fly to our favorite destination by the end of 2022.
Electric Vehicle Bubble bursts
While we believe electric vehicles will take share from internal combustion engines, we also think that competition from the automotive industry is catching up and that valuations have more than priced in the growth in this sector for the time being.
We also wouldn’t be surprised to see the commodities that support this sector selloff a bit as more mines is taken out of care and maintenance and more production comes online. At some stage, we believe the market will wake up to the fact that there are limited barriers to entry in the space and that car manufacturing has been a graveyard for companies over the last 100 years. Finally, valuation matters.
The Australian Small Ord’s will outperform the ASX 100
Not the boldest prediction considering it is coming from the Emerging Companies portfolio manager. However, we think the largest companies on the ASX are going to come under pressure in 2022.
The big four banks net interest margins have come under pressure this year and that is expected to continue due to low interest rates and increasing competition.
The other concern for the ASX 100 index is BHP moving away from their current dual listing, in Australia and London, to a single listing on the ASX. This potentially increases the size of BHP to over 10% of the index. The iron ore price declined in the second half of 2021 and may slip even lower after demand for steel from China plummeted.
Considering the big four banks and BHP will potentially make up 30% of the index, the returns from the ASX 100 will rely heavily on these companies. The Small Ord’s index avoids this problem due to its diversification and we predict it will outperform the ASX 100 in 2022.
Australian Property Market to Finish Year Lower than it Started
Over the past year, Australian housing prices have grown at the third-fastest rate in Australia’s history. Prices surged more than 20% in capital cities, while in the regions, home values increased by 25%. This is primarily due to the ultra-low interest rate environment we have endured through the year, as cheap credit has fuelled demand for all assets, including property. This, coupled with the increasing ability to work from home, has driven both generalised price increases across the country and put pressure on regional areas.
The easy monetary conditions that helped fuel the rally in house prices, however, could in fact become the surge’s undoing. Given the unprecedented amount of money flowing through the economy, it is likely that the Australian economy is going to endure a period of higher-than-average inflation. To combat this, the Reserve Bank of Australia will likely raise interest rates to help keep price rises to modest, sustainable levels. This will in turn result in higher interest rates on Australian mortgages, which would likely simultaneously decrease the demand for properties due to higher borrowing costs. Also, as well as increase the supply of properties as mortgage repayments rise for homeowners with variable rate mortgages and more properties are put on the market to realise capital gains and to avoid being left paying higher repayment costs. These tighter monetary conditions, coupled with history showing us that previous episodes of very strong price growth have been followed by price falls, leads us to predict that the Australian property market will finish 2022 at a lower level than it started.
Gold to Outperform Bitcoin
Going into 2022, the price of gold remains subdued when contrasted to the ‘digital gold’ that is known as Bitcoin. At the time of writing, gold has risen 1.70% in the last year whilst the price of Bitcoin has advanced 153.28%. Bitcoin is coined the term digital gold due to both assets having the attribute of scarcity, both are decentralised, and both are seen as a store of value, especially when the value of fiat currency is in doubt. Due to the amount of money being printed globally, inflation concerns have contributed to the appreciation of Bitcoin. However, we predict that the tides will turn and that investors will seek a hedge against inflation in the form of gold more so than Bitcoin.
We can see the price of Bitcoin falling relative to gold partly due to the rise of ESG-centric investors, as the amount of energy consumed through mining bitcoin is obscene and viewed as extremely environmentally unfriendly. Previously in the year, Elon Musk’s Tesla halted purchases of their vehicles with bitcoin due to concerns over the “rapidly increasing use of fossil fuels for bitcoin mining”. Bitcoin uses more energy than entire countries such as Sweden and Malaysia, and we see this major drawback becoming more salient amongst investor’s thinking going forward. Additionally, it seems more than plausible that the excessive valuations surrounding Bitcoin are reduced, as the current market capitalisation of Bitcoin is currently over A$1.3 trillion – Australia’s GDP in 2021 was A$1.98 trillion, for reference.
Federal Election Result is a Hung Parliament
Since the 2019 election, the Australian Labor party’s strategy has been do nothing and let Scott Morrison implode from within. Learning from the 2019 election’s lesson, the no big bold plans strategy has been working as the Labor party are now favourites to win the election.
With no party really offering a bright alternative or a grand vision for the future we predict the election result will be a hung parliament that could go either way as both parties fight to win over the independent candidates. As a quick aside, it has become apparent since the advent of the 24-hour news cycle that 3-year terms with early elections means progress and hard decisions are regular put on the shelf in favour of voter pleasing policies that kick the can down the road.
Unprofitable small cap tech to have a tough year
Last year we identified lower tier buy now pay later (BNPL) companies to do it tough through 2021, based on frothy market behaviour and much competition coming into the space. This year we have seen a lot of information technology companies promising big things, showing good revenue growth, but seeing losses widen.
The market has been happy to overlook these losses, and in some cases even provide more capital to fund these losses. However, with interest rates on bonds likely to increase and no end in sight for the losses, we predict the market may shift sentiment to see these names as overvalued, requiring a clearer indication of future cash flows before ascribing higher (or even the current) valuations to names such as IHR, WSP, AD8, NOV, NTO, WBT and, ELO.
RBA to stay the course
Today’s topic du jour is inflation. Will it be transitory as supply chain kinks and oil chaos subsides? Or will higher inflation persist? That’s the debate currently circulating around the investment industry. First, some context, Australia recorded 3% CPI growth in the 2 most recent quarters, which is at the top end of the RBA’s target band. But over two years, annualised CPI change is still only 1.8% per annum, below the target band.
The Reserve Bank of Australia has been adamant that rates won’t rise until inflation is sustainably within the target band, which they don’t expect to occur until 2024. However, RBA Governor Philip Lowe recently stated it could be earlier now, perhaps in 2023, given the economic data now being seen.
Despite this, cash rate futures (a derivative product that has the effect of forecasting the cash rate in the future) market is predicting 3-4 rate rises in 2022. This forecast is determined by the market equilibrium of buyers and sellers of this product, essentially reaching a market consensus in the same way share prices reflect a consensus market company valuation.
We disagree with the market and think that the RBA will stay the course and not be required to raise rates at all in 2022, keeping it at the current record low of 0.1%.
We hope you’ve enjoyed our predictions for 2022!
We hope our team predictions have raised further discussions in your cirlce!
Written by Oracle Investment Management team