Year in review 2021

2021 will go down in history as one of the strongest years for the Swedish stock market.

The broad OMXSGI index rose by +39% for the full year 2021.

Stimulus from central banks, combined with a robust economic recovery, contributed to the strong upswing. However, bottlenecks in the form of component shortages and increased freight costs have heightened inflationary pressures. Inflation will be one of the most crucial factors to monitor in 2022, and I see it as unlikely that the risk will be short-lived. The crucial question is at what level inflation stabilizes.

For the month of November, the inflation rate in the USA reached a high of 7%. The Federal Reserve (FED) has signaled that tightening will occur in various stages. China's export of deflation is over, while wage and commodity increases lead to rising prices globally. The rise in the Swedish market, due to increased risk appetite, has led to the valuation spread between the highest and lowest valued companies becoming as significant as during the IT era in 2000. The P/E ratio between companies in OMXS30 is currently at 24 at the highest and 12 at the lowest. Either profits must increase rapidly or prices fall. We will experience a shift in trend, where the likely scenario is that the P/E ratio for higher-valued companies will decrease.

Concerns about rising interest rates make companies with profits far into the future particularly sensitive if there is a setback in growth. Companies with an acquisition agenda are affected by higher capital costs, although companies showing stable growth and making sound acquisitions will likely continue to perform well on the stock market. My main scenario is that we will see rising interest rates coming from low levels, albeit in combination with economic growth, providing a good foundation for a reasonably strong stock market year in 2022. Historically in the USA, after the FED has initiated a mild tightening, the S&P500 has risen by 15% after one year.

The average forecast for the S&P500 for 2022 ranges from +11% to -2%, and the same forecast should likely apply to OMXSGI. We will undoubtedly experience uneven trading, but even if interest rates rise somewhat, it is manageable. Companies are low-leveraged and can raise dividends forward, while merger and acquisition activity will probably continue. We saw this most recently with the bus company Nobina. 2022 will be a challenging year where so-called "stock picking" becomes increasingly important for excess returns. Companies that are low-valued with a decent dividend may be especially interesting to watch in 2022.

My reference portfolio, reflecting a real portfolio, has risen by +34% in 2021. Since its inception in May 2019, it has increased by +135%, compared to the index's +75%.