Analyst Insight
Introduction
The last two years have structurally redefined many aspects of the social, economic, and political fabric of society. As we begin 2022, the global shifts and changes in everyday life that erupted in 2020 and 2021 are likely to continue into 2022. Further, as the year progresses, we are likely to see the stories that define the year evolve and expand. As such, the breadth of stories that will shape this new year is immense and so, in this article, we’ve highlighted some key areas of interest that we believe will be integral in defining and shaping the year ahead. These include matters of grave importance to everyone globally such as climate change. We’ve also highlighted the potential role and the changing stance of central banks as inflation becomes a larger threat. Finally, we highlight the pandemic, the defining obstacle of the last two years which could somewhat end in 2022, according to some experts. As we touch on each of these issues, we’ve established some ideas around how investors may benefit from these happenings.
Climate Change and Sustainable Investing
Without question, a major challenge of 2022 and certainly, the decades ahead, will be climate change. The COP26 conference held in November 2021 marked the 5th anniversary of the 2016 Paris Agreement and in large part, was perhaps the most important conference to date. At the conference’s end, 197 countries agreed on more stringent compromises aimed at reducing the effects of climate change but even then, these compromises are simply just promises that can be broken. Simultaneously, the magnitude of the promises made remains below what is needed to seriously fight climate change. While this remains of grave concern, it cannot be lost on us, that more will likely be done as the severity of the climate problem intensifies exponentially. With that said, the role of sustainable investing has become more important. Sustainability will not just be about reducing carbon emissions but will encompass the transformation of many business models to operate in a sustainable world. This means there will be winners and losers and investors can benefit greatly by targeting companies that are destined to play key roles in providing sustainable solutions that significantly reduce the damage to the environment. An easy example here is Tesla, the electric vehicle company that only delivered 500,000 cars in 2020 but is the most valuable car company in the world, valued at US$1.06 trillion compared to Toyota who sold 9.5 million vehicles in 2020 but is only valued at US$257 billion. Similarly, global funds that focus on Environmental Social and Governance (ESG) Investing have been receiving record inflows of cash as investors are increasingly supporting companies that are working towards sustainability. We expect this trend to continue in 2022 and believe investors will benefit from investing in companies well-positioned to deliver sustainable solutions across varying industries.
The Reduction of Central Bank Support
Towards the latter half of 2021, central banks began to reduce support for economies as inflation persisted longer than expected and to a greater magnitude than envisioned. As rising prices have become more engrained (reflected in the prices of a wider range of goods and services), central banks in both developed and developing economies are expected to raise rates at a faster pace to disincentivize borrowing and spending, in the hopes of reducing inflationary pressures. With that in mind, a good opportunity for investors is within assets that typically perform well in a rising rate environment such as health care stocks, technology companies, bank stocks (particularly banks with a large concentration of floating-rate assets), and significantly fewer liabilities affected by rising rates, such as deposits. Shorter-term and floating rate bonds also become far more attractive in this period, albeit while remembering the caveat of heightened inflation. For most Jamaicans who mainly follow the local stock market, companies with strong cash flow generating capabilities that are less likely to be affected by higher borrowing costs present great opportunities. On the matter of increased rates, we must also mention that markets tend to follow the actions of the Federal Reserve (the Fed) almost religiously. In the event the Fed raises rates too quickly, asset prices could stumble significantly as investors sell. To the extent the Fed continues to support smooth market functioning, asset sell-offs could be worthwhile buying opportunities.
COVID-19 – Pandemic or Endemic?
Interestingly, 2022 marks the third calendar year of the pandemic, and the recent Christmas reopening and subsequent surge in new cases across the globe has reminded many that COVID-19 remains an important threat. Notwithstanding, several countries are reporting relatively fewer deaths despite a surge in infections, pointing to the role the vaccines have played in helping to reduce the severity of symptoms. With continued vaccination efforts and effective antiviral drugs, several health experts believe COVID-19 could lose its “pandemic” status in 2022. At this stage, it would be reclassified as an “endemic” which essentially means infections would reach a steady state where not enough people are vulnerable to start a widespread outbreak but simultaneously, not everyone will be immune so the virus will find hosts. This would place COVID-19 in a category similar to the common cold or the flu. Certainly, uncertainties remain but there will be far more clarity in 2022 as vaccinations continue and more therapies are developed. From an investing perspective, we believe an outcome where the COVID-19 threat is likely to be reduced from a pandemic to an endemic supports investing in sectors most likely to benefit from this change such as travel and tourism. Certainly, it presents an opportunity for greater investment in Jamaica’s own tourism industry from the private sector, particularly considering the triple-digit growth the industry has witnessed recently while remaining below pre-pandemic output.
Concluding Thoughts – Other stories that may shape 2022
In this article, we’ve looked at just three of the stories that are likely to shape 2022. However, there are others that will be important throughout the year such as the rise of the metaverse, the role of cryptocurrency for the future, the high valuation of US stocks coming out of 2021, and what it could mean for returns in 2022 as well as the disappointing productivity growth of many nations across the globe, to name a few. In Jamaica, the relatively lackluster performance of the stock market below that of overseas markets (the JSE’s Combined Index grew by 2.2% in 2021 vs the US S&P 500 which grew by 26.9%) continues to weigh on the minds of many investors and will be watched keenly throughout 2022. The role of climate change specifically in Jamaica as we perhaps rethink or revisit vision 2030 for example is another interesting topic of importance. Throughout the year, we will delve into these and many other stories and highlight opportunities for investors to stay ahead.
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Written by Awah Muirhead
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