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Wednesday, December 29, 2021

Five Biggest Risks to Portfolios in 2022

Five Biggest Risks to Portfolios in 2022
Five Biggest Risks to Portfolios in 2022

Potential Speed
Breakers for 2022

Before saying good-bye to 2021, let's recollect how 2021 was a year of recovery, with all three major averages recording all-time highs, the crypto-mania continuing with Elon Musk's favorite dogecoin taping a 200% surge or that a movie theater chain would offer about 1,200% returns.

However, all good things come to an end, and investors should brace for a "pay-back period" in 2022 following a year of solid gains as macroeconomic risks mount. Here are the top five risks that investors need to watch for when prepping their portfolio for 2022.

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Hawkish Tilt
by Central Banks

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"Tapering" and "Rate Hikes" have been on investors' dictionaries for the last one year; however, Jerome Powell stuck to his "non-transitory" inflation for a very long time. It took a four-decade high inflation to change Fed’s decision, which they followed up with a faster tapering of asset purchases and markets quickly priced in three rate hikes for 2022. A hawkish Fed could be bad news for the markets as lower liquidity will create a bearish sentiment hindering risk assets. The rest of the Central Banks are following the Fed's footprint of tightening monetary policy on account of raging inflation.

Furthermore, a high borrowing cost will likely slow the economic growth in the future, and investors would question if the high valuation for stocks is justified at current levels. History suggests that the taper tantrum of 2013-2018's stocks selloff shows how a tightening Fed spells trouble for markets.

Covid Variants
Spreading Like Wildfire

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After the novel coronavirus, Delta struck in the summer of 2021, and now the new coronavirus variant-Omicron. A heavily mutated version of the virus that is expected to be more contagious than other variants has stirred up concerns worldwide, sending stock markets on a roller-coaster ride.

The Omicron variant has spooked investors as lockdowns have been implemented in parts of Europe, holiday plans are being reconsidered, and investors are always on the edge as to which new variant would emerge such that harsh lockdowns would be reimposed, affecting economic growth

China's Economic
Growth Stalls

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2021 started off smooth for the Chinese economy, with a quick recovery to pre-covid levels. However, a crackdown on anti-trust and fintech companies sparked bearish sentiment amongst investors who were once optimistic of China dominating the world economy. One cannot forget the Evergrande debt crisis that led investors to believe a global contagion was eminent.

China's annualized growth fell to 0.8% for the first three quarters of 2021, well below the 6% pace that the world has come to expect from the second-largest global economy. While China has a reputation for quickly recovering from economic setbacks, it might not be as easy in 2022 since investors are reconsidering China's growth prospects.

Surging Inflation

Graph

Inflation is the increase in prices across an economy that leads to a decline in purchasing power of consumers. More often than not, Economist's term inflation as a hidden tax. And policymakers at the Central Bank understand this clearly, and they are also aware that once inflation happens in an economy, it is very tough to pull it back. The US Consumer Price Index rose 6.8 percent year-over-year in November, its highest level since 1982 when Ronald Reagan was the American president. For an extended period, US Federal Reserve which had termed inflation as transitory, changed its stance on these reports.

Indeed, Transitory turned out to be transitory, with Fed Chairman Jerome Powell saying it is a good time to retire that word. The good aspect of Powell's statement is that the inflation debate is now clearly settled, and the markets will start pricing in faster rate hikes. The significant risk for financial markets is that if inflation turns out to be sticky and continues to be higher, the Central Banks across the world will have to hike rates aggressively and that could kill the global economic recovery.

Supply Chain
Bottlenecks

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Supply chain bottlenecks, basically stoppages in the production system, have impacted many sectors. For example, a semiconductor shortage has severely impacted the production of automobiles, cramping the sector's recovery. By trying to source the goods at the lowest possible price from the perfect location, a supply chain lowers the cost of production. However, the global supply chain is currently disrupted due to the pandemic. For example, China's zero-Covid policies prevent a return to normalization.

Recently a COVID-19 outbreak in the Chinese manufacturing hub of Zhejiang, home to the world's largest cargo port, Ningbo-Zhoushan, disrupted operations there. Even in the US, a shortage of trucks, drivers, and labor at the ports has resulted in ships waiting up to four weeks to unload. Many are not expecting relief until 2023, which could hamper the global economic recovery.

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