What are the best ways to invest your money in 2022?

2021 was another great year for investors as the stock market shrugged off concerns about Covid-19 variants and resurgent inflation to fly higher for the third year in a row. But not every asset class did well. The gold price fell, bonds struggled and cash remains a no-go zone.

So what can we expect in 2022? Unsurprisingly, there is plenty out there to make investors nervous. The Omicron variant is spreading like wildfire, although so far it seems milder than Delta, while inflation hit a dizzying 6.8 per cent in the US in November. There are geopolitical worries, too.

There is another concern. Shares, property and cryptocurrency are floating on a sea of fiscal and monetary stimulus, but 2022 looks like the year in which central bankers and politicians will cut back. Are we finally facing the end of the great bull run?

Shares
In 2019, global shares rose by a thumping 28.4 per cent, as measured by the MSCI World index.

Last year, they shrugged off Covid-19 lockdowns to rise an impressive 16.5 per cent. They did it again in 2021, with MSCI World up another 17.3 per cent so far. In the US, the S&P 500 is up 30 per cent at the time of writing. Clearly, this cannot go on for ever. So, is 2022 the year it all stops?

In the US, every single major sector rose last year, including technology, industrial, materials, energy, health care, utilities, financials and real estate, according to Matt Weller, global head of research at City Index.

Historically, this suggests that we are in a mid-to-late bull market cycle. “If defensive sectors like utilities, consumer staples and health care start to outperform, that could finally signal that the bear market may be around the corner,” he says.

Megacap US tech firms were the stand-out performers once again, with Google-owner Alphabet rising 67 per cent and Microsoft (up 55 per cent), Apple (36 per cent) and Tesla (27 per cent) all putting in impressive performances.

Markets expect the US Federal Reserve to increase interest rates three or four times in 2022, and this could hit “overvalued technology stocks”, says Fawad Razaqzada, market analyst at Think Markets.

“Fed policy tightening will reduce the appeal of lower-yielding growth stocks, especially those with overstretched valuations. Sentiment hasn’t been helped by insider selling of late.”

Rising interest rates will increase debt servicing costs and squeeze company profit margins, says Laith Khalaf, head of investment analysis at AJ Bell.

“The US now accounts for two thirds of global stock market capitalisation, much of this concentrated in a small number of technology stocks. If big tech sneezes, the rest of the world is going to catch a very nasty cold,” Mr Khalaf says.

The travel, retail and hospitality sectors have been hit hard by Omicron lockdowns but do not write off equities yet, Mr Khalaf says.

“The stock market looks like the best game in town when it comes to delivering long-term returns in excess of inflation.

“As ever, investors need to tune out the short-term noise and keep an eye firmly on the long term, investing regularly to smooth out volatility,” he says.

Two markets could outperform, says Richard Whitehall, head of portfolio management at Aegon. “The UK and Japan offer relatively less demanding valuations and are well positioned to participate in the economic recovery.”

Outlook: The bull market has to end at some point and 2022 could be the year. Yet, there is still no better place to invest your money and any dip could be a buying opportunity for long-term investors.

Bonds
Many investors have abandoned bonds, amid negative real yields and fears of a bond market crash. Bonds were traditionally supposed to offer a low-risk income and capital but some argue they have turned into a “high risk, no return” investment instead.

They pay a fixed rate of interest and this will look less and less attractive if inflation climbs, Mr Khalaf says.

“Tighter monetary policy is on the way, barring a significant resurgence of the pandemic, and that could come as a shock to the bond market, which has become accustomed to ultra-loose monetary policy.”

As well as raising interest rates, central banks could start running down their huge bond purchasing programmes, affecting demand.

“Unless we believe monetary policy will never normalise and that quantitative easing is here for ever, there must come a day of reckoning for the bond market. It might be a gradual deflation rather than an explosive rupture, but it does look like a question of when, not if,” Mr Khalaf says. Outlook: Analysts have been warning of a bond market crash for years but it has yet to happen. The higher inflation goes, the bigger the danger.

Cash
The average cash account has fallen in real terms by 2.37 per cent a year after inflation over the past decade, eroding the value of a £10,000 ($13,514) investment to £8,711, according to Brewin Dolphin.

Most people persist in thinking that cash in the bank is risk free, but inflation is a “silent killer”, investment manager Rob Burgeman says.

Many people do not realise this and banks are not obliged to issue warnings as they are with shares. “A more accurate bank statement would show the impact of inflation on your money and include warnings that cash savings may lose value over time,” Mr Burgeman says.

Interest rates will rise in 2022 but inflation will rise faster, according to Mr Khalaf. “Cash therefore still looks like an uncomfortable place to be for the foreseeable future.”

Outlook: Everybody needs a bit of money on instant access for emergencies, but you should never leave money in cash for the long term. The outlook has gone from bad to worse.

Cryptocurrencies
There was no Santa rally for Bitcoin, ended 2021 trading around $46,000. That is still a rise of more than 50 per cent, but it has been sliding lately and this year could be tougher, Vijay Valecha, chief investment officer at Century Financial, says. “Investors have retreated from the most speculative asset classes, worried that an ebbing tide of central bank stimulus and new variant of Covid-19 could spell trouble.”

Bitcoin will need to creep above the $50,000 mark for the bulls to take over again, he says. As ever, anything could happen. For those happy to take a punt, cryptocurrency trader Nick Ranga at AskTraders.