Out with the coronavirus narrative, in with the inflation story for markets in 2022 – so says Santa

This year saw markets recovering from the shock of Covid-19 fuelled by low interest rates and massive monetary stimulus. The virtuous circle can be counted on to turn vicious – eventually

Richard Harris

Published: 9:15am, 17 Dec 2021

Why you can trust SCMP

For the eighth year running, I contacted The Oracle of the Markets to see if he could give me some insight into investor prospects for 2022. I couldn’t find Santa in any of his usual watering holes, and he was pretty slow answering text messages. Then I remembered the old-school method of communication – and called him.

It turned out he was in quarantine at Penny’s Bay. “What happened?” I asked. “It seems that one of my junior elves tested positive over the weekend. Before I knew it, my cave was surrounded by police, and I was marched off as if I’d been arrested.”

I gave my commiserations but couldn’t wait to ask the key question: “What’s the food like?” “Pretty basic. They won’t give me my usual diet of Beef Leavehomesafe and Lamb Currie, and I’ve even had my favourite Jaime Dimon Green Pass whisky blocked at the gate. One of the elves had to tip it into an empty bottle of Booster orange juice!”

Santa has several billion followers on Instasleigh, so he can’t help mentioning the brands. “What’s worse is that I haven’t received a single care package of wine and gourmet food from Hong Kong Monetary Authority senior executives, unlike some senior bankers in quarantine,” he grumbled. “I’m far more popular than any banker, and I don’t have to declare them to the compliance department.”

Spotting a gap in his rant, I asked him about the markets, finding him in a mood to gloat. “Look at my predictions last year, I was bang on,” he started, then added, “Those who do not learn the lessons of history are doomed to repeat them.”

A trader works at the New York Stock Exchange on December 13. As investors are still concerned about rising prices due to inflation, the Dow Jones Industrial Average dropped 175 points in Monday morning trading. Photo: Getty Images/AFP

“What are you most proud of?” I asked. “I told you that 2021 was going to be the easiest year to forecast. We had all the good news narratives arrive at once: the Covid-19 recovery story, zero interest rates, massive injections of money into economies by the central banks, crazy bullish stories on bitcoin and GameStop. It’s irrational. What could possibly go wrong?”

He added: “May I remind you that I said equities would be the place to be in 2021? Didn’t I tell you to keep your tech? Google is up over 60 per cent this year, Apple over 30 per cent.” I couldn’t resist pointing out that Amazon is up only 6 per cent, and Tencent down 18 per cent. “Special reasons,” he said mysteriously. I didn’t ask him to explain.

I ventured, “Looking at my notes, you had two big narratives for 2021. The first was the recovery story…” Santa interrupted, “And was I right! The yellow jersey for share prices goes to Mongolia, which is up 116 per cent in 2021.”

This brought back painful memories about the time I lost my shirt, hat, jacket and wallet in Mongolian shares. “Ho ho ho, it’s all in the timing, dear boy,” Santa said.

“This year to date, the US market is up 25 per cent, Europe is up 16 per cent, India 23 per cent, Taiwan nearly 20 per cent, and Australia 11 per cent. I sought to dampen his ardour: “Japan only managed 4 per cent and Hong Kong was down 14 per cent.” “That’s why you have a portfolio, dear boy,” he said.

“What has been good for us in Hong Kong are the currencies,” continued Santa. “The US dollar index is up over 7 per cent this year, and the mighty Chinese yuan has beaten even the US dollar by around 3 per cent. Not often do you get both stars rising at once.”

“The only problem is that you can’t travel to spend money in cheap Europe or Japan,” he chuckled.

I moved on, “Your other big narrative for 2021 was the vaccine…” Santa replied, “And it has been incredibly successful.” I interjected, “So even though you’re old, Santa, you’re still pretty safe.”

Santa ignored my attempt at levity with an icy pause. “What it does mean is that the virus narrative, in terms of the economy and the markets, is now essentially over. Yes, we have high freight rates and very high inflation, but both will come down early next year – though not back to 2019 levels.”

China holds key to lacklustre 2021 for emerging market equities

“Santa, what are your best tips for next year?” I asked. “What goes up must come down,” he said. “The virtuous circle will turn vicious – but not yet. Real interest rates in November in the US are temporarily at minus 7 per cent”.

“It’s worth borrowing as much as you can to chase bitcoin, then?” I joked, “Don’t,” he said, “that’s what people are doing and therein lies the path of destruction.”

I asked, “So inflation is the big narrative for next year?” “It’s what everyone will be talking about in 2022,” Santa said. “The US just reported inflation of 6.8 per cent for the year to November, the highest in nearly 40 years. Inflation in the UK touched 5.1 per cent, the highest in a decade.

“Not many of us are old enough to remember how inflation affected the markets … but it was generally good. On the other hand, higher interest rates were bad, and the Fed has just signalled three rate rises for 2022. Who wins that battle will determine where the markets end up next year.”

I heard a fevered banging on the other end of the line. “It’s my lunch,” sighed Santa, “Wild boar today. I didn’t know it was in season”. And, with that, he hung up.

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness

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