Even better, the yield on local currency 10-year government debt is 23.0%, compared to 1.8% in the US, which gives a nice cushion versus future currency depreciation, in our opinion, especially since the currency has recently weakened so much.
8. Brazilian stocks to outperform major indices
In our search for exotic stock market opportunities, we usually look for the holy grail of a dividend yield that exceeds the price/earnings ratio. Examples are rare, but can currently be found in Kenya, Laos, Pakistan and Russia. Another example is Brazil, where after a 12% index decline in 2021, the current IBOVESPA price/earnings ratio is 6.6 and the dividend yield is 8.5% (though changing to 7.6 and 7.4%, respectively, based on consensus 2022 forecasts, according to Bloomberg). Having been in the bottom three equity markets for each of the last two years, we suspect 2022 could be the year of rebound, despite (and perhaps because of) the possible election of a left-wing president (opinion polls have Lula well in front).
9. EU carbon goes above €100 per tonne
In the 2020 list we suggested EU carbon would finally break above €30 (it did, even in a recession year) and last year we suggested it would go above €50 (it is now around €85). Climate change is the ultimate externality and we think internalising the problem via pricing mechanisms has a big role to play in limiting its extent (see 21st Century Portfolio). The EU carbon allowance scheme is one such solution, where the right to emit carbon can be bought and sold, thus leaving it to the market to figure out the most efficient way to reduce emissions (the number of allowances is reduced over time). The Stern Review (2006) calculated the social cost of carbon to be $85 per tonne (around €96 per tonne at today’s exchange rate). We suspect that cost will have increased since then. With the world now focused on mitigating climate change, and the global economy perhaps accelerating later in the year if the great reopening occurs, we believe there is a good chance that EU carbon may exceed €100/t at some stage during 2022. And, yes, we feel uneasy about including this idea for a third straight year.
10. Argentina wins FIFA World Cup 2022
This year’s World Cup is being played in December (to avoid the worst of the Qatari summer). Bookmakers seem to favour five-times champions Brazil and reigning champions France (see oddschecker.com).
However, we don’t even know the groups (as play-offs in March will decide the remaining participants), so it is impossible the chart the path to the final. Nevertheless, armed with an incomplete information set, we suspect that Argentina and England have as good a chance as any and we are going with the former, to avoid accusations of home bias.
As a gift for the new year, we offer Figures 4, 5 and 6 which show long term performance data across assets, sectors and factors.
Unless stated otherwise, all data as of 31 December 2021
