ASX shares are "vulnerable" in the short term, but they're set to outperform in the long run compared to other countries.
That's according to AMP Ltd (ASX: AMP) chief economist Dr Shane Oliver, who says there are still many negatives sticking around, pushing stock prices down.
"Relatively calm years like 2021 are often followed by a rough year," he said on the AMP blog.
"Inflation continues to come in stronger than expected largely due to pandemic related supply disruptions and strong goods demand, but also labour shortages and 'reopening' impacting wages — and hence services prices."
It will be hard slog for the rest of 2022
Kardinia Capital portfolio manager Kritiaan Rehder agrees.
"It looks like 2022 will continue to be a difficult year for equity investors," he said.
"Inflation is already becoming entrenched. Coles Group Ltd (ASX: COL) recently reported food inflation in the March quarter of 3.3%, and suggested that price rises were only just getting started."
In addition, Oliver noted the global headwinds that don't look like abating anytime soon, like the war in Ukraine.
"Fear of an escalation resulting in a cut to Russian gas to Europe and/or including NATO countries in direct fighting have added to market jitters, with Finland & Sweden wanting to join NATO, further annoying Russia," he said.
"Lockdowns in China under its zero-COVID policy in response to Omicron outbreaks have hit Chinese growth and further disrupted global supply chains."
Investor pessimism is already "extreme", according to Oliver, but there's more to come.
"We have not yet seen levels for indicators like VIX or the ratio of put options to call options seen at major market bottoms."
But ASX shares will turn around next year
Having said all this, Oliver believes ASX shares will end up higher 12 months from now, as long as the US and/or Australia don't end up in recession.
And he sees enough evidence that inflation and wages growth may have peaked already, which will help avoid that fate.
"Signs of some peaking are evident in our Pipeline Inflation Indicator reflecting lower freight costs and a slowing in commodity prices," said Oliver.
"This could enable central banks to slow the pace of tightening later this year or early next in time to avoid recession."
Compared to international peers, ASX shares are ready to zoom ahead faster.
"While Chinese COVID lockdowns may weigh in the short-term, Australian shares are likely to continue to outperform over the medium-term," said Oliver.
"The commodity super cycle continues – on the back of constrained supply reflecting low levels of resource investment, decarbonisation and geopolitical tensions."
After all, even during the current correction, Australian stocks have fared better than their overseas counterparts.
"This is… evident year to date, where global shares are down 13% and Australian shares are down 4%," said Oliver.
"This reflects their exposure to strong commodity prices and low exposure to tech stocks."
Betashares associate director Max Minack agrees, saying Australian shares are ready to shake off their "underdog" tag and beat the Yanks.
"The dynamics that have buoyed Australia don't seem to be going away any time soon," he said on the Betashares blog.
"As such, Australia again could be cheering another underdog to victory, and investors may continue to see Australian outperformance."
