What Does 2022 Have In Store? – Fintech Zoom Advisor UK
It’s traditional, at this time of year, to speculate about what the future might hold – even if making predictions is a notoriously tricky business.
No one, 12 months ago, forecast that teenage British tennis player, Emma Raducanu, would be lifting a Grand Slam event in 2021. As for ‘Omicron’, it was still best known as being the fifteenth letter of the Greek alphabet.
Not all forecasts hit the bullseye, especially ones to do with money. But predictions can fire up debate as we consider our own financial arrangements for the year ahead.
To mark the new year, we’ve asked commentators to share their thoughts on key financial areas including the economy, the stock market, the energy sector and the insurance industry
Interest rates & inflation
The recent decision by the Bank of England to raise UK interest rates to 0.25% caught City commentators on the hop. The move followed the latest inflation data that showed the UK’s cost of living grew by 5.1% in the 12 months to November this year, its highest level in more than 10 years.
Paul Craig, portfolio manager at Quilter Investors, predicts that interest rates will only be heading in one direction in 2022, and that’s ever upwards: “The Bank has already started the process of moving rates slightly higher than the rock bottom levels seen during 2021 and we expect further hikes next year as inflation continues to bite.”
On the subject of inflation, Graham Bishop, chief investment officer at Handelsbanken, describes the issue as “distracting” and says trends in 2022 will allow central banks to refrain from responding aggressively: “Over the course of 2022, inflationary pressures should fade as supply chains normalise, commodity price rises ease off, and wage inflation in COVID-19-sensitive areas begins to fade.
“It is worth noting that inflation is measured by comparing prices in the most recent time period to prices in a previous time period. This means prices in 2022 will be compared to the elevated prices seen in 2021, which should automatically create lower inflation readings ahead,” he adds.
Interest rates and inflation are inextricably woven into consumer finances, making for an awkward scenario for many at present, says Laith Khalaf, head of investment analysis at AJ Bell: “Interest rates will almost certainly rise again in 2022, but this will be a hollow victory for cash savers, because inflation will rise faster.
“As a result, money in the bank will be losing its buying power even more rapidly. Cash therefore still looks like an uncomfortable place to be for the foreseeable. It’s the only option for short-term savings that might be needed at the drop of the hat, but as a longer-term store of value, the return of inflation has left cash looking even more woeful.”
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The re-emergence of economies from lockdown in 2021 sent their demand for energy into overdrive and helped (literally) to fuel a spike in inflation figures.
Soaring energy prices have not only dealt a hammer blow to nearly 30 UK providers in the past 12 months, they’ve left consumers facing sharp rises in their gas and electricity bills.
Unfortunately, Dr Craig Lowrey, senior consultant at energy analysts Cornwall Insight, is unable to offer any soothing words for the year ahead. “As a result of the continued increase in gas and electricity wholesale prices, our forecast for the default tariff price cap [announced by the energy regulator Ofgem in February 2022 and then implemented in April] has risen to approximately £1,800 per annum.”
This is a rise of nearly £600 on the current cap of £1,277 that came into force in October 2020, with Lowrey adding that his figure excludes the impact of recent energy supplier failures.
The Ofgem price cap limits how much suppliers can charge for each unit a customer uses. The quoted figures are for a year’s supply to an average household with a dual fuel tariff.
With concerns over energy supply availability for the coming winter and wider geopolitical issues that may affect gas European supplies in particular, the wholesale markets are experiencing renewed volatility, says Dr Lowrey: “At the same time, question marks remain over how and when the costs from recent supplier exits will be recovered from bills, with our initial estimates indicating that this could add more than £100 to our forecast.”
You can read more about the prospect for the energy market in 2022 in this article.
The start of 2022 marks a significant change for car and home insurance customers.
The insurance regulator, the Financial Conduct Authority, is bringing in new rules to stop ‘price walking’, the process whereby insurers charge low prices to attract new customers, and then raise those prices at each following renewal.
Brian Brown, consumer finance expert at analysts Defaqto, outlines the new state-of-play: “From January, renewing customers will be charged the same price as new customers, so loyal customers should see premiums coming down in future. It remains to be seen just how insurers will react to this, though without a doubt there will be less to be gained by shopping around each year.”
Brown adds that “from January, anyone looking to make major savings on their insurance will have to search harder to find insurers who could save them money and may well have to buy policies that offer fewer benefits or have lower cover limits or higher excesses.”
Sam White, CEO of Freedom Services, says that, overall, the move should be good news for consumers when it comes to insurance renewals: “If you are renewing your insurance with your current provider, you should see, if not a reduction, then certainly not a rise in premiums as insurers are no longer allowed to penalise customers by charging more at renewal than at new business for the same risk profiles.”
Staying with insurance, James O’Hara, commercial director at Ceta Insurance, predicts that the pandemic and the way people now run their lives will lead to a change in customer expectations: “After an unprecedented 2021, which saw huge changes in the housing market, jobs market, home renovations and more, 2022 promises to have a major impact on insurance.”
O’Hara reckons that disruption to traditional ways of working, coupled with the acceleration of pre-existing trends around the gig-economy and digital services, means customers will have increasingly personalised needs and higher expectations from their insurance products, such as home insurance that covers a newly-built garden office as well as the family home.
He says: “As a result of alterations to homes and changes in the way we work from them, we may also see a rise in the number of homes classified as ‘non-standard’ by insurers.
“While different insurers approach risk in different ways, many will charge excessive amounts, put applicants through lengthy referral processes, or even decline the application altogether if they think a change in use or structure has increased the risk.”
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Turning to car insurance, Freddy Macnamara, founder and CEO of Cuvva, anticipates that 2022 could be the year of fairer car insurance premiums: “We’re going to see a shift in perceptions around premiums that are priced on driving behaviours.
“There have been some great advancements in technology. More insurance companies are going to want to offer unique, tailored prices and policies based on an individual’s driving profile instead of antiquated averages because it’s fairer.
“For consumers, it means that, the better they drive, the less they’ll pay, giving them far greater control over their car insurance.”
There’s less optimism, however, when it comes to the life insurance market.
Tom Baigrie, chairman of LifeSearch, expects 2022 to be a very challenging year: “While insurers and intermediaries alike have coped really well with the pandemic, we expect the huge NHS backlogs in preventative treatment to cause more deaths and critical illness in particular.
“Although prices for life insurance and critical illness cover have not yet risen overall, I expect they probably will through 2022, particularly for older lives. It would be the first time in 30 years that the cost of life cover has risen.”
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Property & mortgages
When it comes to bricks and mortar, the UK property market witnessed frenzied activity in 2021. This was due to a number of factors, such as the ‘race for space’ by homebuyers reacting to the pandemic and government-backed incentives such as stamp duty holidays, which finally drew to a close in the autumn.
Depending on whose property data you trust the most, UK average house price growth has come in at anywhere between 7% and 10% over the past 12 months (the latest figures from Nationwide – 10.4% – came in on 30 November), so what do property professionals predict for the year ahead?
Estate agent Savills says it expects the ‘North-South’ value gap to continue to shrink over the next five years, as affordability constraints slow price growth in the more expensive markets in and closer to London.
Lucian Cook, Savills head of residential research, says: “After such intensity in the market and without the imperative of a stamp duty holiday deadline, we know that there’ll be less urgency in the market from 2022.
“Indeed, we have already seen three-month on three-month house price growth slip back from 3.9% at the end of June 2021 to 1.7% at the end of September. With the prospect of inflationary pressures persisting in 2022, we expect price growth in the near term to be somewhat more muted than we have seen of late.”
Guy Gittins, CEO of estate agents Chestertons, is more bullish: “There are a number of factors that should continue to push property prices up in 2022. The economy is recovering better than expected, employment and wages are booming, and first-time buyers will continue to benefit from the government’s Help-to-Buy scheme until April 2023.
“Most importantly, the number of people looking to move heavily outweighs the number of properties available on the market, although price increases are likely to be tempered by the rising cost of living and the expected increases in taxes and interest rates.
“Assuming national lockdowns are behind us, we think average UK house prices will grow by 4.0% in 2022, before settling at 2.0%-3.0% per annum over the following four years.”
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The UK’s FTSE 100 index of leading companies enjoyed a 14% rise in 2021. That’s a perfectly respectable 12-month return for a basket of stocks that’s made up of large and multinational corporations.
Investment professionals have mixed opinions, however, when it comes to calling the stock market in the year ahead.
For example, Alex Harvey at Momentum Global Investment Management says there’s cause to be positive: “In spite of recent headlines around the emergent Omicron variant, there are plenty of reasons to be optimistic for 2022. Earnings have continued to surprise as the economic rebound continues and, while expectations are high for next year, we are seeing strong data to support future growth.
“UK equities remain discounted in aggregate having failed to match pace with the US over the past year. For value investors there is plenty to like and, with a good chunk of the 2020 dividend cuts having been reinstated, it is one of the better income-paying bourses.”
But Russ Mould, investment director of AJ Bell, says investors need to be wary: “No investor, no politician and no central banker knows what is coming next, nor whether inflation, stagflation or deflation will result from the combination of the pandemic, lockdowns and supply-chain chaos on one side, and massive amounts of fiscal and monetary stimulus designed to boost demand on the other.
“As a result, going ‘all in’ on one investment scenario is probably not going to be a good idea. Portfolio construction will need to address a range of outcomes as, frankly, anything is possible.”
Rob Morgan, investment analyst at Charles Stanley Direct, agrees that it’s sensible for investors not to confine all their eggs to one basket: “There is a real risk that inflation is more embedded than widely expected and that central banks have to put up interest rates faster and to a greater degree than they would like.”
“That’s an uncomfortable scenario for holders of bonds and many other investments, as well as those with variable rate mortgages. It’s not our base case that this unfolds, but we believe it’s a risk that’s been underestimated and it could hit many portfolios with insufficient diversification.”
Meanwhile, Dan Boardman-Weston at BRI Wealth Management, says: “We’ve had an astonishingly good rally in equities since the depths of the pandemic in March 2020 with a combination of loose monetary policy, generous fiscal policy, and earnings recovery driving equities higher.
“During 2022, we’re likely to see monetary policy become tighter to tackle higher levels of inflation, and this may act as a headwind to higher growth parts of the market such as technology. However, this should benefit more value-oriented sectors, such as banks, and so we could see a reversal of fortunes in 2022 compared to the top performers during 2021.”
Boardman-Weston points out that as the UK stock market tends to be more value-biased, this could finally mean we see relative outperformance of UK equities compared to the US market – something which has not occurred since 2016, when sterling depreciated significantly post-Brexit.
Lothar Mentel at Tatton Investment Management, also acknowledges that the past 21 months or so has witnessed impressive market returns. But he now suspects that optimism is already priced in for many assets: “Bad news could therefore shake market confidence, and with emergency policy support set to wind down, that could create volatility in the coming months.
“Ultimately, we are still waiting for the self-sustained portion of the recovery, when central policy support gets replaced by business and consumer confidence, and the economy can run on its own steam. Once that happens, it should restart the cyclical rotation in markets, pushing investors away from the COVID superstars, such as big tech, and into those assets and regions most attuned to global growth.”
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Cryptocurrencies… and beyond
2021 was the year when the Financial Conduct Authority, the UK’s financial regulator, got heavy with the crypto asset space. It published several damning statements in relation to cryptocurrencies warning investors that their entire capital was at risk when trading the likes of Bitcoin and Ethereum.
Appetite among crypto devotees remains undiminished, however, a trend that Rohit Talwar, CEO of Fast Future, can only see strengthening: “In terms of crypto economy participation, market growth will be driven by greater investment by financial institutions, corporate crypto acceptance and increasing balance sheet holdings, and easier access through payments providers such as Mastercard, Visa, and PayPal.
“By the end of 2022, user numbers will rise from over 300 million to 600-900 million globally, and from 3.3 million to over 5 million in the UK.
“Crypto market capitalisation will rise from a peak of around US$3 trillion in 2021, to over US$7.5 trillion during 2022. Ethereum’s market cap will temporarily overtake Bitcoin during 2022. Bitcoin’s price will hit US$150,000 and Ethereum’s US$25,000 at different points during the course of 2022. Bitcoin’s market cap will overtake all listed equities except Apple.”
Staying with crypto, 2021 was arguably the year of the Non-Fungible Token, or NFT. Earlier this year, an NFT by the digital artist known as Beeple sold for $69 million at Christie’s. Check out our interview with New York-based photographic artist and NFT advocate Anna Condo.
Catalysed by the explosion of NFT use, Michael Stimpson, partner at wealth management firm Saltus, predicts that 2022 is going to be the year of the digital asset: “We expect NFT to continue to grow. First, with blockchain technology opening up new ways to store value and trade digital assets without the limitations posed by navigating the existing real-world infrastructure. And secondly, with the digital asset exchanges such as Coinbase and Opensea expanding their services to enable more and more trading to take place, we expect NFT to continue to grow.”