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What could possibly go wrong in 2022?

by , 22 January 2022
What could possibly go wrong in 2022?
Following a shocking 2020, we had a strong economic recovery in 2021.

The US index, S&P 500 ended 2021 up 27%. Its best three year stretch since 1999. The Dow was up 19% on the year, while the Nasdaq gained 21%. Over the last three years, the S&P 500 is up 90%.

The JSE All Share index returned 24% for the year (29% including dividends), with the Top 40 shares on the JSE growing 19% (total returns) for 2021.

Will this trend continue, or will we see a big crash in 2022?

Well, economies still haven't recovered back to pre-pandemic levels - so if they do there's further upside for stocks.

But what are the risks?
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These are the biggest risks to the economy in 2022
 
Threat #1 – Continued supply chain issues
 
Manufacturers the world over are struggling with their supply chains. Earlier in 2021 car manufacturers couldn’t produce cars because of a microchip shortage.
 
In December Distell told liquor stores it couldn’t supply enough product due to a glass shortage. It didn’t have enough bottles for lines like its top selling Savanna, Klipdrift and Gordons Gin. South African Breweries have also confirmed that it is experiencing glass and aluminium shortages and cannot deliver all customer orders at this stage.
 
Continued supply chain issues is a major risk to economic growth if manufacturers cannot produce enough product to supply retailers. Simply put – both manufacturing and retail could be under severe pressure because of this.
 
So what are the causes?
 
Well, firstly – massive re-ordering following a complete standstill at the beginning of the pandemic already put pressure on the system.
Secondly, ports the world over still get shut down because of Covid cases. In China, they are still instituting lockdowns of entire cities for even small outbreaks of Covid. Here’s a great article going into more depth on the supply chain issues.
 
This means there are massive backlogs at ports.
 
Containers aren’t unloaded from ships fast enough. Ports become too full.
Because of so many containers standing around – there aren’t enough containers available when new orders need to be shipped.
 
Threat #2 – High inflation and low interest rates
 
At the start of 2021, the U.S. was forecast to end the year with 2% inflation.
Instead, it’s close to 7%. This is unprecedented for the US. South African inflation also hit its highest point in four years during November 2021 – at 5.5%.
 
The US is experiencing inflation for different reasons to South Africa though.
 
In the US inflation is high because of supply chain issues and high consumer demand, as well as lots and lots of economic stimulus. The threat here is the US will hike interest rates. And if it does, it will hurt the rand as investors will take their money out of emerging markets into higher yielding US bonds.
 
And that’s where SA’s inflation starts to increase. South Africa’s inflation rate is extremely sensitive to the oil price. If oil goes up in dollars – it is bad for us. If the rand weakens to the dollar, we pay more for oil in rand terms even if its price remains steady.
 
High inflation locally means the reserve bank also needs to increase our interest rates – which would put a big stopper to our economic recovery.
Indebted businesses and consumers will be hurt most. Many people bought higher priced properties due to decades of low interest rates. So, if interest rates suddenly rise, many home owners will struggle to pay their bonds.
 
Threat #3 – China’s economic growth could hit a great wall
 
In the third quarter of 2021, China’s economy ground to a halt. The accumulated weight of the Evergrande real estate slump, repeated Covid lockdowns and energy shortages dragged annualized economic growth down to 0.8% — way below the 6% pace to which the world has become accustomed.
 
While the energy crunch should ease in 2022, the other two problems may not.
Beijing’s zero-Covid strategy could mean further lockdowns. And with demand weak and financing constrained, property construction which drives about 25% of China’s economy, may have further to fall.
 
Bloomberg Economics’ base case is for China to grow 5.7% in 2022. A slowdown to 3% would send ripples around the world, leaving commodity exporters short of buyers and potentially derailing the Fed’s plans, just like the Chinese stock crash did in 2015.
 
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Threat #4 – Electricity supply
 
This has been a problem in South Africa for more than a decade now. And its still not getting better. Koeberg, our nuclear power plant, is set for a revamp to extend its life – but this is already behind schedule. With the big nuclear power station down, there will be a lot of extra pressure on the grid – and any breakdowns will mean load shedding.
 
But electricity supply is now becoming a problem in Europe as well. As countries in Europe race to shut down coal and nuclear plants in exchange for renewable energy, they’ve perhaps been too eager. It has made Europe very dependant on natural gas – from places like Russia. And this has seen electricity prices in Europe sky rocket.
 
While it holds a threat to the European economy, it also provides an opportunity for manufacturers in other areas of the world.
 
There are plenty of profit opportunities in the market right now. But you need to remember they aren’t without risk. You need to keep your eye on these risks, and how they could possibly affect your investments in 2022.


What could possibly go wrong in 2022?
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