Three weeks into the new year and it’s time to revisit one of my most popular topics. Will there be a stock market crash in 2022? And what might be the early warning signs of a potential collapse? While reading up on financial markets for hours every day, I hunt for red flags and alarm bells linked to market meltdowns. Here are four distress signals I’ll be monitoring in 2022.

1. The January effect

An old City of London expression reads, “As goes January, so goes the year”. This claims that a stock market’s yearly performance can be forecast by that year’s first month. Interestingly, historical data suggest this correlation holds true, but only to a certain degree. After all, January does contribute a twelfth (8.3%) to a year’s overall result, which partly explains this association. So far in 2022, the US S&P 500 index has fallen about 2.2%. That’s a relatively small movement, but a negative one nevertheless. However, let’s see how 2022 as a whole turns out. For me, this signal is too weak to worry about a stock market crash just yet.

2. Slowing Chinese growth

Growth in the Chinese economy — long regarded as the world’s economic engine — is slowing down. In the fourth quarter of 2021, China’s gross domestic product (GDP; national output) growth slowed to 4% year on year. That’s the slowest pace of expansion in 18 months, taking the country’s overall GDP growth to 8.1% for 2021. Also, year-on-year growth slowed in every quarter last year. China accounted for a quarter of global GDP growth in 2021. Thus, any loss of momentum in the Chinese economy is a global problem. Also, the troubles of hugely indebted developer China Evergrande have cast a long shadow over China’s property market. Again, a Chinese real estate crisis may have consequences for the wider world — possibly even triggering a stock market crash.

3. US inflation running hot = stock market crash?

Currently, my biggest fear is soaring US inflation (rising consumer prices). In December 2021, the US Consumer Price Index (CPI) rose at a yearly rate of 7%. That beats November’s figure of 6.8% and is the highest US CPI level since June 1982. To curb inflation running at a 40-year high, the Federal Reserve will do two things. First, it will tighten monetary policy by winding down its monthly bond purchases from $120bn to zero. This is set to happen by the end of March. Next, the US central bank will gradually start lifting interest rates. Analysts have pencilled in three to four quarter-point rises in 2022. While 2020-21 was a period of massive liquidity injections by central banks, global liquidity is set to slide in 2022-23. Whether inflation chokes off the US economic recovery and triggers a stock market crash is anyone’s guess, but this happened in the early 1980s.

4. Tech stocks and Bitcoin come off the boil

Highly valued US tech stocks have been in decline recently. The tech-heavy Nasdaq index peaked at an all-time high of 16,212.23 points on 22 November 2021. As I write, it stands at 14,893.75, down 8.1% from its peak and losing 5.9% in 2022. Likewise, leading cryptocurrency Bitcoin has lost 7.5% since December and has crashed 38.1% from its November peak. However, I don’t see plunging cryptocurrencies triggering a stock market crash. For me, the reverse is far more likely.

Finally, I’m not as afraid of stock market crashes as I once was. Thus, for now, I’ll keep buying cheap UK stocks for their dividends!

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Key points

• Warren Buffett advocates patience even as inflation runs hot.
• Companies that can easily raise prices without suffering a loss in sales are his bets for inflation.
• The ‘Buffett Indicator’ is an indication of how expensive the market is.

Warren Buffett is one of the most successful investors of all time and his unique insights could help us protect ourselves from inflation.

Be patient. The right opportunity will come

The first step he teaches is not to panic. In fact, this is a good rule to follow at all times when making investments. Yes, inflation is here, but that doesn’t mean our savings are already worthless. Buffett has always advocated a calm and patient approach to investing based on careful research and waiting for the perfect opportunity.

Inflation is a scary word and when experts are sounding alarm bells it can feel like we have to put our cash into stocks as soon as possible.

But inflation can hit companies just as hard as it hits savings. If firms have to raise prices to keep up, they can often see a reduction in sales. So, in times like this there is one key metric Buffett says investors need to look out for.

Can a company raise prices without losing sales?

It’s a simple question, but one which few companies will be able to answer yes to. Buffett’s own portfolio points us towards an excellent example. Apple is one of the most famous and popular brands in the world. I personally don’t buy Apple products, but I know a lot of people who do. They often take pride in their tech, and are willing to pay a premium for it as a form of status. My sister even joked that men who don’t have iphones are less attractive than those who do.

Buffett recognises the power of this branding and counts on the fact that, even if Apple is forced to raise its prices, its loyal customer base will continue to buy its products.

Even so, just because a company might be able to raise its prices doesn’t mean I should buy its shares right now.

The ‘Buffett Indicator’

No matter the year, the company or the circumstance, Warren Buffett refuses to pay ‘full price’ for a stock. There are simply too many events that may come along that can knock down the value. Undervalued shares can still be found, but on the whole the US stock market is trading at an all-time-high. We know this because of the ‘Buffett Indicator’.

The Buffett Indicator is an equation that takes the value of the US market and divides it by the country’s annual GDP, then converts the answer into a percentage to get the valuation to GDP ratio.

Right now, that number is 211%, significantly higher than the historical trend. While this doesn’t mean that the market is going to crash, it does mean investors are currently paying a premium for company shares.

The key lesson I’m taking away from all of this is to stay calm and be patient. Yes, inflation is running hot, but that does not mean I should act rashly. There will be opportunities to strengthen my portfolio, and when they come along, I know exactly what I’m looking for.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As 2022 kicks off, I’m on the hunt for the best UK companies to add to my Stocks & Shares ISA. But sometimes, the best investment could already be in my portfolio. And when looking at PayPoint (LSE:PAY), I see some encouraging signs of long-term growth potential. Let’s take a closer look.

A rising financial payments company

PayPoint provides payment processing solutions to merchants across the UK. Store owners can accept both cash and card payments from customers using its terminals. All transactions are recorded and uploaded to a cloud platform that enables merchants to better manage inventories and analyse crucial sales data.

Beyond this core offering, the group also has a vast network of ATMs and a popular delivery drop-off service. So, what’s been going on with its share price?

As the revenue is generated by charging small transaction fees on each sale, the pandemic has proven to be quite disastrous for its income stream. The retail sector saw a drastic drop in footfall during the height of the pandemic, which has yet to fully recover. As such, the shares of the UK payment processor fell drastically at the start of 2020 and have yet to return to pre-pandemic levels.

Can the share price of this UK stock make a comeback?

Despite what the share price indicates, 2021 has been quite a transformative year for this UK business. For a long time, there has been growing concern surrounding the group’s over-reliance on processing cash transactions. With many consumers opting to use contactless payments courtesy of the pandemic, the fall in cash payment volumes has impacted PayPoint’s bottom line.

But with the rising popularity of digital payment solutions, management has begun modernising operations and moving away from cash transactions. It started by selling off its Romanian business in April for a £30m profit. Using the proceeds, the company went on a mini-shopping spree and acquired RSM 2000 for £5.9m. The goal is to incorporate its mobile payment technology into PayPoint’s POS devices.

With its legacy products slowly being phased out and the retail environment improving, revenue for the first half of its 2021 fiscal year came in 15.6% higher than a year ago. And thanks to improving margins, pre-tax profits rose by 30%, excluding the proceeds from its Romanian disposal.

Time to buy?

As with any investment, there are always risks to consider. PayPoint is by no means the only company operating in this space. And its years of over-reliance on cash transaction has placed it somewhat behind the competition. Management has begun rectifying this problem. But whether the new strategy is enough to get the company back to pre-pandemic levels, only time will tell.

Personally, I’m optimistic. The recent actions taken seem to be prudent. Seeing a renewed focus on digital payment solutions, as well as increased interest in the e-commerce space, makes me believe these UK shares still have plenty of long-term growth potential. Combining this with a recently increased 5% dividend yield makes me tempted to buy more PayPoint shares today.

Zaven Boyrazian owns PayPoint. The Motley Fool UK has recommended PayPoint. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As a long-suffering Lloyds Banking Group (LSE: LLOY) shareholder, perhaps I shouldn’t ask myself questions like “Can the Lloyds share price double in 2022?” But it’s been recovering strongly, so a bit of optimism surely can’t hurt.

Lloyds shares were hammered by the Covid-19 stock market crash. And to see them dropping below 30p at their low point was painful. But over the past 12 months, they’re up 55% compared to the recovering FTSE 100‘s 13%. I think that’s just the start, and I’ll explain why.

The core reason for the Lloyds share price weakness is that banking underlies the entire economy. And much of that economy relies on lending. When business is in a bad patch, banks are pretty much guaranteed to suffer. With Brexit hot on the heels of the banking crisis, followed by Covid-19, it’s hard to remember a worse patch.

Lloyds’ recovery efforts have impressed me, particularly in cutting costs and refocusing on lower-risk business. But no matter how lean the bank might have become, the UK base rate is still only 2.5%. There’s very little margin for lending profits there.

Still, the rate did rise in December, from 0.1%, which is a start. Consumer Prices Index inflation hit 5.1% in November 2021, up from 4.2% in October. That’s largely an inevitable consequence of our bounce back after the pandemic-driven economic slump. But it does put upwards pressure on interest rates.

Economy stronger than pre-pandemic

In November, UK economic output exceeded pre-pandemic levels for the first time since the crisis began. As I see it, the economy should be back to traditional patterns before much longer. That includes sustainable economic growth, heading towards traditional inflation levels, and with commensurate interest rates.

If lending volumes increase, and rising base rates provide better margin opportunities, I reckon Lloyds’ income should get a nice boost.

And then there are dividends. My investment in Lloyds looks terrible purely on a share price basis. But my dividends have taken a take a lot of the sting out of it.

The payout was suspended in the crash, but only by demand from the PRA. The bank itself had no say in it. And dividends are already back. They’re admittedly low right now, but progressive, and I don’t think it will be too long before they reach attractive levels again.

Lloyds share price valuation

What about the Lloyds share price valuation? At the halfway stage, the bank reported earnings of 5.1p per share. Should that be repeated in the second half, we’d be looking at a price-to-earnings multiple of only around 5.5. I think that’s way too low. But doubling the share price would take it to 11, which I see as too optimistic right now.

And, of course, even if interest rates do rise, they could still remain low by historical standards for a few more years yet. So there’s clearly still some dangerous downside potential here.

On balance, I doubt Lloyds shares will double this year. But I’d be happy enough to see them get halfway there, which I think is a possibility. Lloyds is still risky, but it’s a risk I’m happy to take.

Alan Oscroft owns Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2021 was challenging for Melrose Industries (LSE:MRO) as the FTSE 100 stock dropped by 18.3%. As a quick reminder, this firm is essentially a holding company. It uses its resources to acquire struggling engineering businesses. New management is then installed to turn these companies around, eventually adding value to Melrose’s books and enabling the group to resell them later for a higher price.

Let’s explore what happened throughout last year.

 Spring: results and disposal of Nortek

Delivered early in the year, the 2020 full-year results for this FTSE 100 stock were as bad as expected. Excluding its Nortek Air Management division, aerospace, automotive, powder metallurgy, and other industrial segments all saw revenues tumble courtesy of the pandemic. Overall, the group’s revenue fell from £10.9bn in 2019 to £8.8bn. And because of operational disruptions as well as changes in strategy, margins also suffered. The result was after-tax income dropping from a gain of £55m in 2019 to a loss of £523m the following year.

However, management’s focus in 2020 shifted from profit generation to cash generation. The change in strategy was to reduce the risk of becoming over-reliant on debt financing, and this plan appears to have worked. Free cash flow for the year increased by 6% to £628m while net debt fell to £2.8bn from £3.3bn.

In April, the leadership informed investors that it had signed a deal with US firm Madison Industries to sell its Nortek Air Management business for £2.62bn. Melrose acquired the company back in 2016 for £2.2bn and has received around £700m of cash inflow since then. That places the total return from its 2016 acquisition at 78%. On an annualised basis, that’s a return of 21.2% each year – something seemingly not reflected in the FTSE 100 stock’s share price.

The deal was closed in June, with most of the proceeds used to pay off debt. However, £100m was used to reduce the pension deficit of GKN – an aerospace business acquired in 2018. And £730m was returned to shareholders through a special dividend.

Overall, the mixed performance didn’t satisfy every investor, and the stock ended up falling around 20% by mid-July. 

September: FTSE 100 stock starts to look healthier

As the disruptions of the pandemic started winding down, operations once again ramped up. Total revenue for the first six months came in 5% higher at £3.8bn. However, £832m of this originated from its recently disposed Nortek Air Management. Obviously, that income will no longer be generated moving forward.

The bottom line stayed in the red, albeit by only £151m versus £585m the previous year. But thanks to the surge in cash provided by the recent sale, net debt fell drastically from £2.8bn at the start of the year to £300m. This jump in financial health seemed to give investors confidence in the recovery process since the share price jumped over 10% within a few days.

What’s next for Melrose?

In October, management reported further improvements within its aerospace segment with a 16% revenue growth. But its automotive and power metallurgy divisions continue to suffer from supply chain disruptions. Combining this uncertainty with the spread of the Omicron variant pushed the share price even further down, bringing the full-year loss to 18%.

A clearer picture will form when the full-year 2021 report is released in March. If the impact is less severe than expectations, the FTSE 100 stock could start recovering quickly. But the reverse is also possible.

Zaven Boyrazian owns Melrose shares. The Motley Fool UK has recommended Melrose. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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One of the great things about classic value-led investing is I can buy shares and hold them for a long time. When the strategy clicks, out-of-favour stocks and businesses with temporary problems can recover over time.

And when that happens, ongoing operational progress can drive stocks higher in the years ahead. And as the outlook for a business improves, the stock market sometimes ratchets up a company’s valuation.

Returns can be worth pursuing

So a company that was once trading with a price-to-earnings rating of perhaps eight can eventually be seen by the market as a hot stock again and trade on a multiple of, say, 20. And that new rating will likely apply to higher earnings too — so the overall outcome for value investors can be spectacular.

Of course, value investing doesn’t always generate such good results. Sometimes low-rated businesses prove to be cheap for very good reasons. And it’s possible to buy a value share that then goes on to get even cheaper and never recover. If I keep holding dogs like those I’ll lose money in the long run.

But, for me, the balance of risk against potential reward favours picking value shares when the time looks right. And my impression is it’s a great time to be targeting UK stocks with robust value characteristics.

One stock on my radar is the FTSE 250‘s Ashmore (LSE: ASHM). The company operates as an emerging markets investment manager. And at around 285p, the share price is down about 36% over the past year.

In today’s second-quarter trading statement covering the period to 31 December 2021, the figures are negative. The firm declared a $4bn decline in assets under management in the period. And that arose because of net outflows of $2.2bn from the company’s funds and negative investment performance of $1.8bn.

A positive outlook

Chief executive Mark Coombs reckons the underperformance arose because of “Persistent global inflation expectations, new Covid-19 variants and weaker growth in China.” And the “challenging” conditions for emerging markets continued through the final months of 2021.

I don’t currently hold any shares in Ashmore, but those emerging market investments already in my portfolio have been weak lately too. My hope is the situation will improve shortly making the investment space attractive again.

And Coombes is optimistic as well. He said the global macro-economic environment looks set to be more supportive for emerging markets in 2022. And he thinks that because of factors such as fiscal and monetary stimulus for China’s economic growth. And in the US, Fed policy tightening “is already reflected in valuations.” Meanwhile, commodity prices “are providing a tailwind to the terms of trade, and therefore the external accounts, of exporters.” 

Coombes explained in the report that “very little” of the positive outlook is priced in to fixed income and equity valuations in emerging markets. And that situation suggests to me the area is a potential value investment theme worth pursuing.

And with Ashmore’s share price near 285p, the forward-looking dividend yield for the current trading year to June 2022 is a smidgeon below 6%. Of course, there are no guarantees of a positive long-term investment outcome for me.

But I reckon the value proposition looks sound with Ashmore, and the stock is high up on my watchlist. I’d buy it now if I had spare cash.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2021 was a year of recovery for the stock market following the shock and uncertainty of 2020, and these FTSE 250 shares did particularly well. Both car retailer Inchcape (LSE: INCH) and investment trust Caledonia Investments (LSE: CLDN) rose by 41%. Could another rise be on the cards this year? 

Riding a wave – for now

Second-hand retailers are riding a bit of a wave at the moment caused by the shortage of new cars. It’s unclear how long this will go on for. Further signs from Inchcape or its competitors that pricing remains strong, and the supply of new cars low, could see the shares perform similarly to last year. All the more so if there is a rotation out of growth shares because of inflation concerns. A value share like Inchcape could benefit from investors looking for profitable lowly-rated companies.

The investment case isn’t only about the market though. Management is also ambitious. The car retailer has a new strategy. The FTSE 250 company said the new strategy, dubbed ‘Accelerate’, features two growth pillars — ‘Distribution Excellence’ and ‘Vehicle Lifecycle Services’.

Looking at its medium-term financial outlook, in ‘Distribution Excellence’ it said it is expecting a compound annual growth rate for profits in the mid-to-high single-digits. In ‘Vehicle Lifecycle Services’, meanwhile, Inchcape said it is pencilling in at least £50m of incremental profit.

While that’s positive, car retailing is typically a low-margin industry. Inchcape is no exception. Operating margins are currently around 2%. That makes car retailing a volume-based game, so the company needs to sell a lot of cars to make a lot of profit.

Overall when it comes to car retailers I prefer Vertu Motors, which I suspect could be a takeover target. I’d be more likely to add it to my portfolio than Inchcape, as I don’t think the latter will do as well again this year. 

One of the top FTSE 250 shares? 

Meanwhile, as a Scot, perhaps I have an unconscious bias towards Caledonia Investments. But the analytical part of me thinks it’s an investment trust that could do well this year – even after last year’s strong performance.

The shares still trade at a discount to the net asset value of 17.5%. That doesn’t necessarily make them good value, but it does provide some margin of safety.

The trust is well established and has been going for 140 years. It invests in both public and private companies with top holdings on the publicly-listed side of things being Oracle, Microsoft and Texas Instruments. UK companies also feature including Polar Capital, Croda International and Unilever. Quoted companies account for 31% of the trust. Some 28% is in private companies and 30% is in funds, these are indirect investments through Asian and US-based private equity funds. The rest is cash.

The ongoing charge versus peers is quite reasonable at 0.98%. Similar trusts will often by charging double. 

The downside could be that the discount widens further and the share price falls. Caledonia’s multi-asset strategy could put investors off investing because it’s less clear what they’re getting. 

However, with access to private companies, I think Caledonia Investments adds a lot of diversification and so I’m really thinking about adding it to my portfolio. This is a share with a path to increase substantially again this year if the discount narrows and the net asset value, so the value of its investments rises. 

Andy Ross owns shares in Polar Capital. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Croda International, Microsoft, Polar Capital Holdings, Unilever, and Vertu Motors. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.