What Investors Need to Know about 2022 – Part I – the UK

Was mich nicht umbringt, macht mich stärker
That which does not kill me makes me stronger

Friedrich Nietzsche (1844-1900), Twilight of the Idols (1889)

Inflation will persist

On 21 December Chancellor Sunak announced a further package of measures to support the struggling hospitality industry – although the reversion of the VAT rate for hospitality businesses from the present emergency 12.5 percent level back to the normal 20 percent level is still due to take place next April. But even before that, the gap between tax revenues flowing in and government spending flowing out was dire. In November, the government had to borrow an additional £17.4 billion to balance the books. The UK national debt is still increasing at pace.

So, the government faces a poor fiscal outlook at a time when inflation is gaining momentum. On 15 December we learnt that UK inflation had hit 5.1 percent – the highest for ten years. The “transitory inflation” that the central bankers told us was a minor irritation is now beginning to look worryingly persistent. Moreover, the public payroll continues to expand; in fact, the public sector is growing faster than the private sector while the total number of people in work is higher than ever before. That is in stark contrast to what happened under the Coalition government (2010-15) led by Mr Cameron, when there was a significant fall in the number of public sector employees.

With fewer EU immigrants and many older workers leaving the labour market altogether, combined with an expansion of the public sector, severe labour shortages seem destined to continue. That implies that wages will continue to rise and that that, in turn, will sustain inflation. The problem is that persistent inflation is socially and economically corrosive, as I shall unpack soon.

Covid will re-mutate – but we shall survive

Covid-19 will continue to remain “unstable” and re-mutate periodically. I’m expecting Omega by this time next year. But there has been a fundamental shift in mainstream opinion – in England certainly – against more lockdowns. Consider the backlog of NHS diagnoses and procedures; consider the logjams in the courts. Consider the damage to children’s educations (and thus their employment prospects) and the carnage in the hospitality sector. Consider your loved ones’ mental health.

The academic modelers (as I predicted last year) have bust their static worst-case-scenario models – and the likes of JP Morgan have at last stepped in to produce their own. The privatisation of modelling will be one of the brightest stars of 2022.

There are at least four reasons for optimism on the pandemic front.

First, I foresee an ongoing campaign of vaccine boosters – probably for the rest of our lives (for my demographic, at least). Hopefully, the Johnson government will not drop the ball again on vaccine boosters – after a splendid initial vaccine programme the booster programme began ineffectually. We shall never be “fully vaccinated”; though hopefully active citizens will continue to be adequately vaccinated. This will not come cheap. To re-vaccinate the entire population every six months will cost about £5 billion a year ( but much less that “Test and Trace”).

There are reports that scientists at the Walter Reed Army Institute of Research in the USA will shortly announce the discovery of a vaccine that will be equally effective against all Sars and Covid virus variants – just as flu jabs are effective against a multitude of flu viruses. Novavax will shortly arrive in the UK after highly promising studies. Future vaccines might be able to offer longer-lasting immunity.

Second, we are getting better at testing. Britain is getting through more lateral flow tests (nostril swabs) than almost any of our peers – with another 700 million on the way. The infected are being isolated; and, sensibly, the isolation period is being reduced.

Third, at last, we have the prospect of the anti-viral cavalry. Better late than never, wonder drugs from Pfizer and Merck have been shown radically to benefit those who fall sick but are not yet hospitalised – even those suffering from minor symptoms. Paxlovid, a protease inhibitor developed by Pfizer, looks very promising. It is likely to be approved by the MHRA imminently. Molnupiravir was originally developed by Miami-based Ridgeback Biotherapeutics (private) which partnered with Merck to commercialise the product. Molnupiravir was approved in the UK in November and the “Panoramic” trials have already commenced at GP hubs, coordinated by Oxford University. It seems that it works best when administered in the very early days of contagion.

Antivirals work by targeting the genetic material at the centre of a viral organism which generally does not change markedly from one mutation to another. Rather, it is the spike protein that evolves rapidly. The downside could be that the widespread use of antivirals could hasten the evolution of mutations.

The UK government placed substantial new orders for these elixirs in the week before Christmas – but has been accused of lacking urgency as deliveries will only start next March. Remdesivir (developed by Gilead) has been shown to have modest efficacy against Covid, but the cheap off-the-shelf steroid dexamethasone has also been shown to reduce deaths. The monoclonal antibody Ronapreve may currently only be administered under medical supervision. The future may lie in developing cocktails of antiviral drugs – as is the case with the treatment of HIV.

Fourth, more people have acquired natural immunity because they have already had Covid-19 of one variant or another. People who have had Covid and then been triply vaccinated (like this writer) supposedly have “super-immunity”, probably because their bodies produce T-cells which are effective against current and hopefully future strains.

Even without future lockdowns, sporadic travel restrictions are likely to occur next year and the year after. That is bad news for airlines, though good news for the domestic hospitality sector. As time goes by Covid-19 will cease to be a pandemic but will become endemic. People will regard it as a form of flu – inconvenient, but only life-threatening for the most vulnerable.

Oh, and the inquiry into the conduct of the pandemic chaired by Baroness Hallett will be a monumental waste of time and public money. It will be another 12,000 pages by 2025 which not even “the experts” will read.

Mr Johnson’s woes will continue

The prime minister’s problem is not that Foreign Secretary Truss and Chancellor Sunak have been “on manoeuvres” but that just two years since he won a resounding electoral victory most Tories no longer think he is a Tory.

Forget the pseudo-scandals about who had parties in Number Ten and who paid for the PM’s wallpaper – these are things that would not even make the news in sensible countries. The real problem is that as every problem arises – the pandemic being the most tediously persistent one – Team Boris’s gut reaction is to mobilise the state and to spend more money. Just as the Conservative-dominated wartime coalition government (1940-45) veered in favour of the state and thus gave the 1945 election to Labour, so might the Tories cede power in 2024 to Sir Keir Starmer who, as I write, is eight percentage points ahead in the polls for the first time since the days of the great magician Blair.

And if Labour wins next time round then we do risk becoming a “Covid state”. That is one where at any hint of widespread sniffles, the powers that be lock down and blight the hospitality sector, not to mention our social life and our mental health. What became clear in 2021 is that the more left-wing and the more paternalistic politicians are, the more they favour risk-aversion. When Nanny insists that the children must not go out for fear that they catch cold, the children grow up to become dull wimps.

We knew that Mr Johnson does not possess much by way of strategic vision; but we were assured that he had a knack of surrounding himself by the best and the brightest – Mr Cummings was once considered such. What has been more surprising is that our PM does not possess any keen political instincts either: if he had allowed Owen Patterson to serve just one month in purdah, then the Staffordshire North by-election would never have happened, and the gargantuan humiliation for the Tories would safely have remained only a bizarre possibility in a world of speculation. Self-inflicted wounds – on himself and on his 200-year-old (and ruthless) political party – have now become commonplace.

But the biggest problem for our PM is not that his backbenchers are fractious or that Sir Keir’s Labour is becoming (at last) more assertive, but that the mother of all cost-living crises will be visited on the good people of Britain in Q2 2022 – and almost nothing can stop it now. Eye-watering increases in utility bills will coincide in April 2022 with a steep increase in National Insurance Contributions and Council Tax. The average family grocery bill will explode. And they can forget foreign holidays and city breaks – a fare on easyJet to Benidorm that you might have cost £60-80 pre-pandemic will cost over £200 next year (plus the relentless costs of lateral flow tests). The Resolution Foundation is talking about “the year of the squeeze”. On the plus side, unemployment is likely to stay low.

The last time there was a tax revolt in the UK was in 2008 when the Brown-Darling Exchequer abolished the 10 pence tax band (originally introduced by Norman Lamont under the Major government). The arising stink was so potent that it had to be resolved by a significant rise in the personal allowance – something that PM Brown had previously resisted. That cost Mr Brown’s reputation dear. If there is another policy reversal in response to an outcry, that will cost the government’s credibility further.

Mr Johnson’s greatest asset is that, like a reality TV star, there are no other politicians who can compete in terms of celebrity. Literally, everyone knows who he is; yet few people outside the Swaffham (Norfolk) Conservative Club have any idea who Liz Truss is. (I even doubt that President Putin reads her speeches). And Mr Sunak, while much admired by finance-types (like this writer – he is the first Chancellor in my lifetime who is brighter than the mandarins who surround him), for all his economic lucidity, simply does not have the pulling power amongst the party faithful. Sajid Javid and Jacob Rees-Mogg also have keen analytical minds which can spot defects in academic models; but they are not realistic contenders for the leadership. The dark horse could be Jeremy Hunt, who was the runner-up last time. He might surprise us.

Mr Johnson’s resistance to further restrictions on normal social life this Christmas – in stark contrast to Ms Sturgeon in Scotland and the ponderous Mr Drakeford in Wales – will contribute to his partial rehabilitation next year. Mr Johnson seems finally to have, Houdini-like, struggled free from the straitjacket of SAGE (Scientific Advisory Group on Emergencies) orthodoxy.

And why isn’t SAGE counterbalanced by a corresponding committee of economists who quantify the economic consequences of what SAGE proposes, so that in a well-informed society a robust cost-benefit analysis can be put into the public domain? (Such as those conducted last year by Professor Richard Layard at the LSE and Professor David Miles at the NIESR). Why should a nation be ruled by a niche group of virologists? This conversation reminds me of the Brexit debate when the Brexiteers were accused of not listening to “the experts” – when the whole point was that experts, according to their perspectives, radically disagree.

On balance, Boris will probably survive 2022. He is certainly determined that his premiership will last longer than Mrs May’s 1,106 days in power. And next year he will bask in the reflected glory of Her Majesty’s Platinum Jubilee celebrations in February and then again in June; the Commonwealth games in Birmingham in July-August will not do him any harm; and it wouldn’t surprise me if he attends the World Cup in Qatar in November-December where England will most certainly get to the final (and then be defeated by Germany on penalties).

That said, I can’t see him making it to the end of 2023. I don’t think he will have the stomach to fight the general election of May-June 2024, and a new leader will need time to establish his/her own premiership. Moreover, Mr Johnson needs to earn some serious money to finance his growing family.

When people see that one year on, the latest hike in spending on the NHS, which now employs a staggering 1.85 million people, just produces more of the ration-by-waiting-list same, they will turn sour. I know people of roughly my demographic who are talking about retiring to places where private health care is first-world and relatively affordable – such as Dubai and Penang (Malaysia). I know people who are considering getting treatment in India, just as many people from the Gulf do, knowing that they will be treated graciously and competently and will not be subjected to the gross indignities of an NHS ward. Even the lower middles classes are now availing themselves of private healthcare. That is why there are opportunities in the private healthcare sector for investors – and that will be one of my themes in 2022.

If 2020 was the year that we “clapped” the NHS, 2021 was the year when all but the worst-off gave up on the idea that that the NHS will ever be transformed into something as decent as our economic peers enjoy. The “Protect the NHS” ideology – devised by Team Johnson – signalled to us all that the NHS is a sepulchre more important than those it is supposed to serve and heal. Like the EU, it is unreformable; and however much money is thrown at it, funded by the taxpayer (and those who are still prepared to lend to the UK government), it will never deliver to international standards.

The next generation of Tory leaders get that (as I shall detail soon) and think that a free-at-point-of-demand monolith should be reserved for the less well-off. The well-off should pay towards their own healthcare – and might even be able to afford to do so if healthcare costs were tax-deductible, and taxes cut. But that will never happen under the current leadership.

Market economics favour risk management, while socialism is about risk aversion and elimination. It’s as simple as that.

Market Outlook

Last year I foresaw that 2021 could be the year that the London market broke free from it range-bound doldrums and might even attain the 8,000-level. In fact, it rose from 6,571 to close on Wednesday (29 December) at 7,420. That was a respectable 13 percent up. The story next year will be about the return to “normality”; although the new normal may be different from the old. Rates will rise but not by much. The futures markets suggest that dollar rates will still be under 2 percent by the end of 2026. The question will be whether inflationary pressures are attenuated by deflationary demographics and increased productivity through technology. The age of rampant QE may be over.

The outlook for profitability on both sides of the Atlantic looks sanguine. That could trigger more share buybacks which boost share prices. There will be more interest in high dividend stocks as inflation becomes embedded. I foresee a year of high volatility but modest gains on the London market. The 8,000-mark target for the FTSE-100 is realistic.

As the year turns again, I hope my readers will escape the clutches of the Hi-Viz jackets bearing clipboards, corporate box-tickers, calorie-counters, vegan proselytisers, eco-warriors and the wine police. Wishing a healthy and prosperous New Year 2022 to all. And please don’t get too comfortable behind those accursed masks.

Next week don’t miss: What Investors need to know about 2022 – Part II – Europe

Listed companies cited in this article which merit further investigation:

Pfizer (NYSE:PFE)
Merck (ETR:MRK & NYSE:MRK)
Novavax (NASDAQ:NVAX)