Share markets will continue to power ahead in 2022 and reward investors that stay in the game, rather than those who drop out.
That's the opinion of Montgomery Investments chief investment officer Roger Montgomery, who said portfolios will need to be selective about which ASX shares to hold.
"Investing in quality, avoiding the rubbish and not jumping at the shadows that are already a part of the investment landscape are the keys to navigating markets and it will be no different in 2022."
The S&P/ASX 200 Index (ASX: XJO) has had an exceptional run recently. It rose an attractive 13% over 2021, and more than 54% since the March 2020 COVID-19 crash.
Therefore some investors are nervous that 2022 would bring a brutal dip.
While acknowledging the risk of a 10% to 15% correction, Montgomery said such crashes can happen any year, as they were usually triggered by unexpected "Black Swan" events.
"Generally, it won't be what we already know that brings on a correction," he said on the Montgomery blog.
"For now, we can probably rule out a correction from inflation or the current Omicron strain of COVID-19 because there are as many adherents of these ideas as there are detractors."
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Inflation is not going to trigger a stock market correction
Current inflation fears will not spiral out of control, according to Montgomery.
"Most of the headlines warning inflation isn't transitory cite manufacturers and retailers who state emphatically prices aren't coming down," he said.
"But that isn't tantamount to accelerating inflation. It just means there will be no deflation."
He took the example of the United States.
"If US inflation this year is 7% but next year 6.5%, the retailers and the manufacturers will be right – prices aren't going down," said Montgomery.
"It is also true, however, that price increases are decelerating and that's called disinflation."
Montgomery noted disinflation is actually "very good" for especially growth shares, if it's accompanied by economic expansion.
"Innovative companies and those with pricing power, which tend to be those with sustainable competitive advantages, do best in a disinflationary economic expansion," he said.
"Read any of our documentation and you will find we have always preferred businesses with sustainable economic advantages because it is these companies that produce attractive returns on their equity."
If disinflation arrived, it could actually supercharge 2022 to another massive year of returns for shares, noted Montgomery.
The pandemic is much more likely to whack ASX shares
For Montgomery, investors need to keep a closer eye on the coronavirus than inflation, since that's much more likely to bring up a surprise for the market.
"Transmissibility appears to be increasing with each variant… COVID-19 may yet have a long way to evolve," he said.
"Understandably, Main Street is worried a variant emerges, able to undermine the current crop of vaccines. Trading at near-record highs, market prices suggest such an outcome is not anticipated, so such a development could be an unmitigated disaster."
But picking high-quality companies provides the best protection against even unexpected slumps in shares.
"Through every crisis the highest quality companies, by definition, have fallen less and then rallied first and fastest afterwards," he said.
"I suggest the same pattern will emerge during and after the next crisis."
Longer term, once international borders open up to supply more workers into the Australian labour pool, shares could be pushed up even further.
"I currently expect we will return to structurally lower wages growth and therefore structurally lower inflation and interest rates. All very positive for markets."
