In 2022, the good news about the Australian stock market is that stocks are likely to be trading higher by the year’s end.
This report by Wealth Within chief analyst Dale Gillham and senior investment analyst Janine Cox assesses likely trends.
In this article
- Mechanics of the money flow
- Look for lower-risk sectors
- What about bank stocks?
- Opportunity in healthcare
- Last year's losers could be winners
The Australian market is likely to return to its historical trend. This means Australian investors are going to have to adjust their expectations for growth in 2022 as we are unlikely to see a repeat of the 20%-plus growth in 2021.
The focus from here is about balancing good growth and income, putting the bulk of investment funds into defensive sectors and considering investing a portion into short-term growth opportunities in sectors that were sold off in 2021 and may be ripe for a rebound.
Demand for blue-chip stocks paying good dividends will be strong in 2022.
So, we expect investors will look for companies that pay reliable dividends at or around the market average. The challenge will be in selecting the right stocks that will rise in value, otherwise chasing a dividend could cost investors more in capital losses. So, it is most important to choose stocks that are likely to represent the lowest possible risk.
Mechanics of the money flow
Before considering where to look for these stocks, it is important to consider the mechanics of the money flow.
Commbank estimates that as a nation we currently have excess savings of $240 billion and we are willing to spend up big.
This very point is of major significance for our stock market in 2022 because as we spend this money, it will invariably flow into the stock market either through direct investments or to bolster company bottom lines.
Areas likely to receive support are retail spending, travel and leisure, technology and household services.
With strong retail trade data in Australia and positive consumer sentiment, pre-Christmas spending has already hit record levels and is likely to remain strong through the festive season. And while consumer sentiment remains positive, our spending is likely to continue to support the local economy. Particularly as we are unlikely to see most Australians resume their plans for overseas travel in 2022.
In July 2022 keep a close watch as big fund managers will shuffle portfolios at this time and you can gain great insight into how the market views particular growth opportunities in stocks that benefit from spending on things such as travel.
Look for lower-risk sectors
Investors are likely to hear about good or higher dividends in 2022 which will create interest and lure some investors into the market. Remember that a high dividend may indicate higher risk to your capital and so avoid stocks with low levels of liquidity and particularly those outside the top 200 largest companies.
Smaller stocks by market capitalisation entice investors with above market average dividends. My advice is play it safe this year. Also, understand what a high dividend can indicate, which could be due to a declining stock price.
It is extremely unwise to purchase stocks that are falling in value.
We believe sectors that are likely to be lower risk and receive investor support will include sectors that were at the top of the board in 2021 and may include Consumer Discretionary, Consumer Staples, Communications Services and Financial Services.
Property and Healthcare can be added to the list of potential opportunities to find stocks that provide good growth and income. As the economy shifts to an environment where inflation will be the focus, defensive investments are likely to return to high single-digit returns, provided economic conditions remain positive.
What about bank stocks?
The current forecast indicates growth may slow for bank stocks, however, these shares are likely to remain very popular with investors.
Positive consumer and business sentiment and a buoyant Australian property market will support the Financial sector and in particular Australian banks in 2022.
Investors are likely to forget that the banks fell around 40% in 2015 through 2016 and will look to banks for good growth and income in the coming years.
Investors are hopeful that we are seeing the start of a new era for banks and are wise to wait for confirmation that recent falls will be short-lived before investing heavily.
Remember that stop losses are still a must. The sector is entering a new phase having moved beyond the Financial Services Royal Commission.
The Australian Securities Investments Commission indicated that the recent civil proceedings against ANZ for around $25 million would be the final investigation as part of the Commission.
Opportunity in healthcare
Australians love healthcare as a defensive area of the market and this sector is still in recovery, so good growth opportunities exist.
With the easing of COVID-19 restrictions, Australians will become more confident about lining up for elective surgeries and other medical procedures which were delayed during the pandemic – but this will take some time to return to normal service levels.
Pharmaceutical companies are also likely to benefit from the recovery and this is definitely an area to watch.
Last year’s losers could be winners
Remember to consider the contrarian view in 2022, as last year's losers are likely to present investors with the opportunity to find winners.
Savvy investors will look for good stocks in those areas of the market that were sold off this year including Materials, Energy, Utilities and Information Technology.
The biggest stocks are a wise choice in the current climate. If you are feeling bulletproof after having made some good gains in 2021, stay alert and remember to pull back from the emotion of the market and apply caution when selecting stocks, particularly if they may represent a higher level of risk to your capital.
Above all, investors are getting wiser and more will start 2022 with good risk management plans and solid exit rules to preserve the recent gains.
- Written by Wealth Within chief analyst Dale Gillham and senior investment analyst Janine Cox.