Liechtenstein December 16, 2021 – The year 2021 is drawing to a close and the new year is casting its shadow ahead. Andreas Wölfl, founder and CEO of the European certificate issuer iMaps ETI AG with the iMaps Capital Markets brand, takes a look ahead to 2022 and offers clear views on the currently prevailing topics: Inflation, China and blockchain.
Inflation – here to stay
In 2021, inflation, which had already been declared dead, has made a loud comeback. If the central banks are to be believed, this is a one-off effect of the coronavirus measures that will quickly subside. Ludwig Erhard, the former Federal Minister of Economics, already stated that inflation is always caused by reckless policies.
The major central banks on both sides of the Atlantic have long ceased to be the guardians of monetary value and price stability and are now enjoying their roles as financiers of careless government spending policies. The fact that consumer goods inflation did not set in years ago is solely due to the fact that economic productivity has risen sharply as a result of globalization and technologization, thereby reducing costs.
However, if you look at asset prices such as real estate, you quickly realize that inflation has not just prepared its comeback in 2021, but has been on the rise since the end of the financial crisis. What began with asset prices is now spilling over into consumer prices.
Several drivers will ensure that inflation will remain above the European Central Bank’s (ECB) and the Federal Reserve’s (Fed) target of two percent for the next few years, if not decades:
- Disruption of supply chains
A large part of the current price surge is due to the disruption of supply chains. These are mainly due to the corona crisis, but not only. The open conflict between the USA and China in particular is leading to globalization being reduced, if not stopped, in some areas. Companies must also reorganize their supply chains independently of coronavirus. - Flood of regulations and laws
The more laws and regulations that have to be observed, the greater the administrative burden. In both the public and private sectors, the proportion of employees working on administrative tasks has been rising steadily for years, which slows down productivity. The flood of regulations and laws that we are currently seeing in the European Union is therefore acting as a driver of inflation. - Combating climate change
There is no question that we need to take decisive action against climate change. However, the challenges are enormous and entail huge financial costs that are not matched by monetary returns or productivity gains. These
Fact will continue to fuel inflation. In future, the 2020s could be remembered as the age of greenflation.
- Central banks’ interest rate policy
Central banks have been pursuing a zero interest rate policy for years and recently even switched to a negative interest rate policy. However, in order to send the spectre of inflation back into the bottle, a shortage of money and an increase in interest rates to at least a positive real interest rate would be necessary. Nevertheless, we will probably not see such measures from central banks, especially the ECB, for quite a while yet.
Conclusion: Inflation is here to stay. As real estate prices have already risen sharply and the demand for raw materials is unchecked, investments in gold and precious metals as well as mining and mining companies are a good option to protect yourself against permanent inflation.
China – The comeback of the RedChips
2021 was a terrible year for investors in Chinese equities. Shares have fallen across the board and the valuation gap to US equities has widened significantly. There were many reasons for this:
- Political intervention by the Chinese Communist Party:
The private education sector was smashed virtually overnight and IT companies were put in their place. At the same time, the influence of the party was strengthened. Almost all major branches of Chinese companies in the country now have their own party cells. Cooperation between private companies and the party was institutionalized. - US-China conflict:
The trade war between China and the US is escalating and is unlikely to end any time soon. The question is whether it will turn into a military conflict – even if it is “only” a proxy war – or whether it will remain an economic decoupling.
Numerous Western investors have at least divested their listed investments in China. Non-Chinese companies whose value creation lies almost entirely in China have been hit particularly hard. The listing of such companies – especially from America – is increasingly being called into question by the USA. Unlike Chinese companies registered in China, however, they will not be welcome on Chinese stock exchanges either.
However, the massive sell-off this year also offers a historic opportunity. China will continue on its path to becoming the world’s number one economic power. This will require tech giants, but also other global champions. Even if these do not conform to communist ideology, China will support them as long as it serves the Communist Party’s claims to power. I therefore expect a comeback of the red chips – especially the big Chinese tech giants. However, when it comes to appointments to company boards, greater consideration is likely to be given to nominating long-standing members of the Communist Party and thus incorporating the power of the government.
The greatest risk is a military escalation. Although the likelihood of this is probably extremely low, it is certainly there. If China and Russia were to form a military alliance, for example by invading Ukraine and Taiwan at the same time, it would not only lead to a bloodbath there, but also on the stock markets.
Conclusion: Taking all aspects into consideration, Chinese equities are likely to recover. Investments in Alibaba, Tencent, baidu, Fosun International Group and Sinopharm could benefit from a comeback of the RedCaps. As a precaution, however, I would stay away from Chinese real estate companies.
Blockchain applications – investment products on the rise
The rise of blockchain is unstoppable. I therefore expect a further increase in the main token prices in 2022, as well as a flood of new financial products for digital assets.
The waxing and waning of Bitcoin is also imminent. Ether, the native currency of the Etherium network, is becoming increasingly interesting as an investment, even if the gap in the crypto market is still large. Nevertheless, there is a good chance that ether could overtake bitcoin as early as 2022 and take its place as the most highly capitalized cryptocurrency. As it has the smart contract function built in and is based on the energy-efficient proof-of-stake principle. Other native currencies such as Solana are also waiting in the wings.
However, I see the biggest growth area in decentralized finance (DeFi) applications. These are only just being discovered by professional investors. They offer significantly more inflows into hedge funds, exchange-traded instruments or participation certificates on smart contracts in the DeFi sector than into individual coins. The license income that can be generated in the DeFi sector is simply too attractive for this market not to grow massively.
On the regulatory side, the EU Directive “Regulation on Markets in Crypto-Asset” (MiCA) is expected to be adopted in 2022. It is intended to provide a clear regulatory framework for crypto service providers and corresponding legal certainty. However, it will be another two years before it is implemented in all countries in the European Economic Area. I also expect Europe to expand its leading role in crypto-based exchange-traded investment products. The United States Securities and Exchange Commission (SEC) will not allow physical Bitcoin ETFs or other investment products that invest in blockchain tokens or applications in 2022.
Conclusion: The crypto market will continue to consolidate its position in the investment sector and establish itself. Ether will over time overtake Bitcoin in terms of sustainability. At the same time, license income in the DeFi sector offers the greatest growth potential. Unregulated crypto service providers will lose market share and Europe will continue to assert itself in terms of exchange-traded crypto investments.
About iMaps ETI AG
iMaps ETI AG is an issuer of Exchange Traded Products (ETP) in the Principality of Liechtenstein with a focus on asset manager certificates in the form of Actively Managed Certificates.
iMaps Capital Markets focuses on providing asset managers with a platform for issuing exchange-traded instruments (ETIs) as a white label solution in order to map the respective investment strategy. The spectrum includes ETIs on traditional investments such as equities, derivatives and funds as well as on digital assets as underlying assets. As a subgroup of exchange-traded products, they are an interesting, fast-growing and cost-effective alternative to funds. Thanks to the approved securities prospectus of iMaps ETI AG, it is also possible to offer ETIs publicly to private investors.
Further information is available at www.imaps-capital.com
Disclaimer of liability:
Opinions expressed in this document do not constitute analysis, investment advice or trading recommendations, do not necessarily reflect the views of all team members at iMaps and may be revised from time to time.
