WA’s best brokers look at what will move markets in the new year and reveal their top stock picks for 2022

Six of WA’s most well-regarded stock brokers share their views on the issues that will move markets in the new year and reveal their top stock picks for 2022. Jason Skinner — JP Equity Partners What do you see as the key themes of the market in 2022? The key themes will be centred on the US and global inflation becoming ‘persistent inflation’ and how the US Federal Reserve tapers back asset purchases from COVID-19 stimulus alongside interest rate hikes. US inflation is likely to result in a pullback for tech and high price and earnings companies, however Australia’s raw commodities such as iron ore and gold could bode well in the new year as talks of a commodity “super cycle” begin to resurface. Do you see the pipeline for raisings and IPOs remaining strong or cooling? In 2021 we have seen a large oversaturation of IPOs, specifically in the resource sector, so I suspect we will see this pipeline of IPOs could cool off in the first half of 2022. We believe IPOs and capital raisings in particular sectors, like ESG-focused renewables, carbon credits and uranium will remain strong throughout 2022. What are the key opportunities and threats? We believe the key opportunities for 2022 remain ESG-focused speculative stocks and value stocks, followed by a return of the commodities “super cycle” narrative in about Q3 of 2022. Uranium, iron ore and gold prices are likely to outperform in the new year, while a reshuffling of investment away from growth stocks to value stocks are likely to also be major drivers. Additionally, persistent US inflation could see a dual appreciation in gold and crypto currencies as US dollar hedges, we prefer gold as the less volatile safe haven. Persistent inflation poses a serious threat in that it could be accompanied with weak economic growth, and this can make the overall stock market vulnerable. As previously stated, we believe high PE stocks and growth stocks are the biggest threats to portfolios. However, value stocks and high commodities prices should bring the WA resources sector back into vogue. Stock picks Greg Galton — Canaccord Genuity What do you see as the key themes of the market in 2022? Global markets approach 2022, with uncertainty about the outlook still high, including the course of the pandemic and potential new variants, and the path of inflation and central bank policy-tightening. How quickly interest rates might rise remains unclear, but with genuine scope for inflation pressures to ease as activity returns more to normal over time, it may be that central banks still do not need to tighten overly aggressively to maintain sustainable recoveries, in our view. In Australia, with the recovery delayed by recent lockdowns, but under way again, inflation pressures less pronounced at this stage and tightening by the RBA likely to be later, we think the ASX200 could have more scope to rise further, with earnings having recovered less since the pandemic and with valuations more reasonable. Do you see the pipeline for raisings and IPOs remaining strong or cooling? As long as market conditions remain reasonably buoyant, we would expect the pipeline and IPO raisings to remain relatively strong. Investors are looking to enter into some of the emerging megatrends, such as electric vehicle battery technology, health and wellness and other disruptive technology, such as blockchain, to name just a few. This desire to gain exposure to these emerging technologies should ensure IPOs in these sectors continue to attract capital from investors. What are the key opportunities and threats? Rising inflation and higher interest rates are the consequences of the recovery in economic growth, coming from monetary and fiscal policy stimulus, after the impact on global economic growth caused by the initial pandemic outbreak. This higher growth, higher interest rate environment is typically beneficial for sectors and companies that are exposed to economic growth, specifically resources and energy, as well as banks and financials, construction materials and consumer discretionary stocks. We see two major threats to equity markets. Firstly, COVID-19 remains the key risk the world is facing, particularly if a dangerous wave of a highly transmissible variant makes its way across the globe. Only those countries getting vaccinations into arms will be able to tame COVID-19. That is the condition for shops, bars and offices to reopen permanently, and customers and workers to have the confidence to leave their homes. Secondly, the other key issue is the impact of rising interest rates. Central banks are currently in the process of withdrawing monetary stimulus and will then turn their attention to when they need to raise rates to tame the current high inflationary environment. This prospect of rising cash rates will ultimately be priced into bond prices. This is important for company equity valuations given bond yields are used as the reference rate to value equities. Stock picks Heather Zampatti — Bell Potter Securities What do you see as the key themes of the market in 2022? The drive toward renewable energy and battery storage will continue its strong momentum as the effects of climate change lead discussions and actions globally. This entails commodities including lithium, nickel, cobalt and graphite. The structural shift to more flexible working patterns has been accelerated by COVID travel restrictions. Stocks in online shopping and home supplies may continue to find a new level of support. Companies like Premier Investment, JB Hi-Fi and Metcash are in focus as people shop closer to home and online. Warehousing and logistic companies have featured with increased online shopping and parcel movements globally. Supply chain concerns continue. Potential increases to inflation and rises in interest rates may weigh on residential property and share markets initially. High dividend, defensive companies may still be a key focus as the interest rate and solid dividend differential remains favourable in sectors like banks and infrastructure. There remains a disconnect between the push to renewable energy and the world’s reliance on fossil fuel as we transition to clean power generation. Oil prices should remain supported as demand keeps up with supply limitations. As travel restriction ease companies that were sold down in the travel-related sectors should see renewed interest. We are seeing Sydney Airport experience a takeover as investors position themselves in anticipation on restrictions easing. Companies like Qantas, hotels and Flight Centre should find support. Do you see the pipeline for raisings and IPOs remaining strong or cooling? We have seen in 2021 an enormous appetite for raisings and new company issues. This momentum looks set to continue in areas such as clean energy and critical minerals with the world demand for battery storage. Any threat to expected global growth, such as inflation and COVID, may weigh on raisings as investors become more cautious in any uncertainty. What are the key opportunities and threats? Threats include rising inflation which might see related interest rate increases. This will put pressure on assets including residential property and shares, especially those companies in growth areas rather than those that pay solid dividend income. COVID outbreaks and new strains could cause lockdowns again, limiting movement and economic activity in areas like hospitality and travel. A continuation of supply chain disruptions is also a threat as well as skill and labour shortages, which could continue to limit economic activity. In many threats, there are also opportunities. Online shopping and home supplies have benefited from travel restrictions and structural changes, while warehousing and logistics companies are in increasing demand with online shopping growth and the increasing global movement of goods and parcels. Climate change recognition continues to ignite the need for commodities needed for battery storage while health and pharmaceutical companies have come into focus as the globe deals with COVID 19. Stock picks Ian Parker — Euroz Hartleys What do you see as the key themes of the market in 2022? I believe the market will start to attribute more realistic valuations to some of the very overvalued sectors. Some IT companies and resource companies that are yet to build their projects have very optimistic valuations currently. I believe it will be a more “value “-driven market. Do you see the pipeline for raisings and IPOs remaining strong or cooling? I believe the pipeline will cool. Some of the recent IPO raisings have been very disappointing and reflect the current “over exuberance“ of valuations. Investors will get sick of losing money in new deals. What are the key opportunities and threats? A very significant threat (and opportunity) is the spectre of inflation. I strongly believe that inflation will be higher next year than current forecasts, and this will lead to higher interest rates. Again, that has an effect on asset values and reinforces my “chase value“ approach. It will be a positive for commodity prices and the gold price. Stock picks (Disclosure: Mr Parker owns these stocks. They are his personal views, based on 30 years market experience, and may differ from official Euroz Hartleys research) Davide Bosio — Shaw and Partners What do you see as the key themes of the market in 2022? Given we have seen a strong rally in equity markets since the initial pandemic sell-off in early 2020, I believe that value will be a key theme for the year ahead. Investors are now faced with the need to distinguish what investments have risen on the back of momentum as opposed to opportunities that are well priced and still represent value going forward. The global economic themes around inflation, real interest rates and the “reopening trade” will likely dominate the media over the year. I maintain the view that gold will be one of the best asset classes going forward as we continue an environment of high government spending and negative real interest rates. Do you see the pipeline for raisings and IPOs remaining strong or cooling? We have seen an incredible number of IPOs and equity capital markets raisings over the calendar year. My personal view is that the momentum for many of these opportunities is slowing and investors are becoming more discerning, particularly for early stage IPOs. I expect to see a modest slow down in new listings, however given the strength in capital markets and the increased levels of activity — particularly in the mining and exploration sectors — placements will continue to be strong. What are the key opportunities and threats? The best opportunities in the market may develop as a result of increasing M&A activity. We have seen a period of strong earnings and balance sheets across many sectors and when you combine that with very low interest rates, the landscape for takeovers is only improving. Investors who focus on better-quality, strategically placed mid-cap companies may find that some industry heavyweights adopt M&A as the next strategy to drive growth. The main threats are geopolitical as China tensions continue and additional challenges associated with the pandemic that may continue to provide concerns for global growth and markets. Stock picks Eddie Rigg — Argonaut What do you see as the key themes of the market in 2022? Energy transition will be a key theme in 2022, the continued focus on decarbonisation, renewables and achieving “net zero” carbon emissions will be a focus. Major beneficiaries will include copper, lithium and nickel stocks. Uranium is also well placed. There will be greater awareness that the biggest risk to the energy transition is the ability to supply the volume of raw materials required — can supply keep up with demand? Central banks are in a very tight corner – inflation is taking hold and central banks cannot afford to smack it on the head, so they will stay behind the curve. Raising interest rates will be a minefield given elevated debt levels. Gold offers excellent insurance and will be strong as a result. China is a tale of two halves: For the first half, Chinese authorities will let their property sector bleed, dragging down commodity demand. In the second half, the effects of strong stimulus will start to take hold which will drive energy transition metals prices. On the COVID front, expect some short-term uncertainty and volatility but as booster shots kick in, this risk will reduce. Do you see the pipeline for raisings and IPOs remaining strong or cooling? The IPO and capital raising pipeline is set to cool off as investors stop throwing money at everything that moves and become more selective. However, we are seeing corporate activity on the rise, especially in the gold sector, where larger players are growing and diversifying their production base by way of acquisition. What are the key opportunities and threats? We see uranium’s new lease on life, traditional energy and battery minerals as key opportunities in 2022. We expect that China growth may surprise on the upside on the back of stimulus at a time when other global economies are tightening. Gold will continue to operate as a store of value. We will start to get some clarity on construction costs for undeveloped projects given recent cost pressures. Capital-light businesses and drillers will present another opportunity. On the threat front, market valuations are generally high and we are looking at interest rates trending higher. This presents market risk, particularly for more expensive areas of the market such as technology. Inflation is a key threat, especially rapid cost-push inflation, If it is sustained and goes higher, this will put increasing pressure on central banks to raise interest rates. Central banks getting it wrong is a major threat as is managing the Australia-China relationship. Stock picks

WA’s best brokers look at what will move markets in the new year and reveal their top stock picks for 2022

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