A look at key 2022 changes in global financial markets

Kenya’s monetary policy committee (MPC) meeting held on Wednesday resolved to keep interest rates at 7per cent to support economic recovery. The committee noted that inflation was cooling off with December readings dropping to 5.7 per cent.

The biggest inflationary pressure was coming from higher global oil prices. The MPC noted that it expects inflation to remain within a target of 5per cent in 2022 as the government moves to lower electricity tariffs and stabilize oil prices.

The MPC report indicated that the Kenyan economy has rebounded strongly and is set to accelerate in 2022. With the Kenya shilling trading at 113.55 against the US dollar, export activity is expected to grow significantly in 2022. This is expected to strengthen the Kenya shilling in return.

In the US, the Federal Open Market Committee (FOMC) completed its monthly meeting on Wednesday. The FED chose to retain rates at the 0.1-0.25 per cent range and deal with ending its asset purchase program by March in preparation for a rate hike.

This was agreed amid pressures that inflation had hit 7 per cent, a 40-year high, and that it was hurting household budgets.

The forward guidance by the FOMC has led to optimism in the forex market which has strengthened the dollar in anticipation of the much-awaited interest rate hike in six weeks.

The US stock market has tanked in the last three weeks as the withdrawal of stimulus and quantitative easing funds take effect on overpriced tech stocks.

The SP500 index has dropped 9.31 per cent, the Dow Jones index 6.61 per cent, and the Nasdaq 14.11 per cent since the beginning of the year. Investors are worried that the current prices are indicating a bear market for US stocks and that the market correction could continue diving.

The US stock market has turned into a stock pickers territory as some individual stocks continue thriving in the chaos. The clearest highlight is in the energy sector where stocks have made double-digit gains since the beginning of the year.

To mention but a few, Chevron Corporation is up 13 per cent, Exxon Mobil +21 per cent, Schlumberger +32 per cent, and ConocoPhillips +20per cent year-to-date (YTD).

This is mainly because of US West Texas Intermediate (WTI) oil rallying 15.55 per cent YTD and Brent oil rallying 13.70per cent YTD.

With global oil demand growth amid the easing of Covid-19 restrictions and rapid economic activity, oil prices are expected to break the $90 barrier and hit $100 per barrel in 2022.

Some individual stocks have made an impressive start to the year with double-digit gains despite the overall market being bearish. For instance, Las Vegas Sands has rallied 17per cent YTD amid speculation that Macau, China will extend its license by 10 years.

Activision Blizzard, the gaming company that owns Call of Duty and Candy crush has rallied 18per cent YTD after Microsoft announced it will acquire it for an estimated $69 billion.

Looking at the red side, Moderna has made a highlight as its stock plummeted 38.99per cent YTD amid the easing of Omicron variant fears.

The Netherlands and the US have lowered Covid-19 restrictions and mandates with Denmark and France set to follow. This is dampening demand for vaccines and could lead to a bigger selloff in vaccine stocks.

The European Central Bank (ECB) has maintained a hard stance that it is not looking to hike interest rates until December 2022. This is aimed at creating a fertile environment for economic recovery. Inflation remains at 5 per cent and is expected to drop to 4.7per cent next month.

Since the Eurozone asset purchase programme is set to continue until December this year and the US is set to end its own in March, investors are strongly betting that the EURUSD currency pair will continue plummeting through the year.

The Euro has already lost 1.60 per cent against the US dollar since the 1st of January 2022. More volatility in the forex markets is expected in the year as major central banks embark on monetary policies to stimulate economic growth while checking inflation not to overheat their respective economies.

Potential goldmines lie in sectors that can thrive in high inflation environments and high-interest periods. As global stocks continue plummeting, investors will be looking to buy them at discounted prices.

This could include selecting stocks in the consumer staples sector, energy sector, technology sector, banking industry, aerospace and defense stocks, luxury goods stocks, and healthcare stocks.

Economies that hold interest rates and continue their asset purchase programmes for longer might experience stronger stock markets but significantly higher inflation.

On the other hand, economies that hike rates and end their asset purchase programmes might experience huge stock market corrections but a stronger currency.

The technology sector took a big hit last year and is continuing to plummet this year. At some point, I expect the tech stocks to be so cheap that investors will no longer ignore the rates.

To optimise opportunity, investors will be looking to accumulate stocks that have demonstrated a strong revenue and earnings growth over the last eight quarters.

Investors will also be considering the industry strength where the individual stock is operating as well as the industry’s compounded annual growth rate.

Understanding these metrics and fundamental changes in the global financial markets will be crucial to identifying trading opportunities and thus, a market-beating portfolio return.

Rufas is research & markets analyst, Scope Markets