Aswath Damodaran, a professor of finance at New York University, is considered an authority on equity valuation. He believes that markets have been permanently transformed by the two years of turmoil caused by the pandemic. While he expects markets to return to normal in 2022, he believes that some sectors will never regain their pre-pandemic levels.
What are the main trends that will affect the markets in 2022?
Markets are definitely returning to normal. The last 24 months have seen a lot of uncertainty and should be considered an exceptional period that is behind us. In the year ahead, we will therefore experience the same trends and questions as in the pre-pandemic period. Will European and US economies continue to grow and how fast? Can China, now the world’s second largest economy, continue to grow at a rate of 10% per year?
So the pandemic has not had a lasting impact on markets?
Yes, it has. Some sectors and companies have been permanently transformed by the crisis. Carnival Cruise will probably never return to its pre-pandemic levels because demand for cruise holidays is not about to pick up any time soon. Similarly, airlines will not recover the same number of passengers as in 2019, as people are flying less. People are now used to using video conferencing rather than sending a businessman from London to New York for a two-hour meeting. For example, during lockdowns revenue shot up for the video conferencing platform Zoom and the smart home exercise bike manufacturer Peloton. They will retain some of these gains, even if people are no longer forced to shelter at home.
If you had to name one big winner from the pandemic, who would it be?
Tesla. The company’s valuation has tripled or quadrupled in the last two years, while the pandemic brought its competitors – traditional car manufacturers like Ford, Volkswagen and Daimler – to the ground. In fact, the crisis could springboard Tesla into becoming the world’s largest car company.
How can investors profit from these trends?
The virus has accelerated trends that have been in the making for the past decade, such as automation and migration towards online services. That’s why the combined valuation of giant tech companies such as Facebook, Google and Amazon climbed by about $1 trillion between 2011 and 2020. This trend is likely to continue, but these firms’ share price is now sky-high. In the shorter term, oil companies – since scaling back production, thus pushing the price per barrel upwards, are thriving. But if I were to give investors one piece of advice, I’d say to focus on an index fund. As markets return to normal, these funds remain the safest strategy for protecting your gains.
What will happen with inflation over the next 12 months?
This is the big mystery for 2022. The threat seems even greater than it was in 2021, when some degree of inflation was expected due to supply chain issues and supply and demand imbalances. Interest rates will have to rise next year and that will cause inflation.
What if a new variant emerges that escapes the vaccines?
The question would then be whether markets react as placidly as they did in 2020. That year, markets rose 20% overall, while the world was submerged in one of the worst crises in history. The markets viewed the situation as a one-off event that was not going to repeat itself. So they did not overreact. Things will be very different if the pandemic becomes a recurring event.
Has the post-pandemic recovery been even across regions worldwide?
No, Asia and the United States have regained their strength faster than Latin America and Europe. Europe suffers from an ageing workforce and slowing economy, like Japan 20 years ago. However, Asia, where the pandemic started, has returned to growth quickly. The continent’s medium-term prospects are also the best, with its young population and growing middle class.
However, Chinese markets have been shaken in recent months...
The Chinese government decided to crack down on large technology groups such as Tencent and Alibaba. They started to accumulate too much power for its liking. This policy has driven down their market value by 30% to 40%. Putting money on the Chinese market is currently very risky. Will Beijing push forward on its crusade or halt? No one knows. The motives are purely political.
Aswath Damodaran - Professor of finance at New York University
Born in Chennai, India.
Received his PhD from the University of California, Los Angeles.
Began at New York University, where he teaches several MBA courses on corporate finance and valuation.
Published The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses.
Published his latest book, Narrative and Numbers: The Value of Stories in Business, on the power of good storytelling on corporate value.