After great returns from January to October, are we headed to a lean patch of the market?

After a relatively good year-to-date performance so far with the ASX 200 returning more than 11.5%, one key question arises from market participants: Will the bull market continue in 2022?

In our opinion, we would broadly agree that there might be a deep correction ahead. Thus, there is a period of extended volatility, and in volatile times, absolute returns would not be as great as they were in the past. However, we still think that the equity market remains the best asset class to invest in. Although, the latest change in the macroeconomic environment could affect stocks. This change is the ramp-up pace of the tapering recently announced by the Fed. Hence, we could expect liquidity to be lessened with tapering on board. Furthermore, the interest rate cycle will tend to rise with better news on the US economy.

The rate hikes are coming a bit ahead and that is what the bond markets are telling us. Consequently, given the uncertainty around that, we would agree that it is not the time to expect a strong double-digit kind of returns for most of the stocks onward to 2022. We could broadly assume the equity market to return between medium to single digit in the next few months.

What are the sectors that will particularly perform well in this macro-environment?

For us, the safest bet could be sectors of the market that have still not yet “fully discounted” future recovery. We think mainly about domestic cyclical such as capital goods, infrastructure, and materials. Hence, these sectors are relatively safe despite the cyclicality, and that is where we expect earnings revisions to happen. Moreover, the valuations are still not fully reflective of their potential which is normal in a cyclical.

Likewise, global cyclical, such as raw materials, commodities, and energy feed into industrials. These are also helped by the US$1 trillion infrastructure bill being passed in the US and the return of the US recovery on the demand side.

Australia’s strong investment in infrastructure will likely boost the domestic commodities and materials sectors’ future earnings

As part of the Government’s record $110 billion 10-year infrastructure pipeline, an additional $15.2 billion over ten years is being committed to the road, rail, and community infrastructure projects across Australia. These new commitments will support over thirty thousand direct and indirect jobs across the lives of the projects. As part of this package, the Government is committing $2 billion to support the delivery of the Melbourne Intermodal Terminal. This project is expected to boost productivity by increasing the efficiency and capacity of the national rail freight network and taking thousands of trucks off the road. Additional road and rail commitments across Australia include a $2.6 billion for the North-South Corridor, Darlington to Anzac Highway in South Australia.

The project will also comprise a $2 billion Great Western Highway Upgrade from Katoomba to Lithgow in New South Wales. $400 million in additional funding will also contribute to the development of Bruce Highway in Queensland. Furthermore, $380 million will be allocated for the Pakenham Roads Upgrade in Victoria, whilst $237.5 million will go for the METRONET to support grade separations and the elevation of stations in Western Australia.

As part of this infrastructure project, $150 million will also support the development of the Northern Territory National Highway Network along with the $132.5 million for the Canberra Light Rail, Stage 2A in the Australian Capital Territory.

And finally, $113.4 million will be allocated for the Midland Highway Upgrades in Tasmania. This package also includes an additional $1 billion to extend the Local Roads and Community Infrastructure Programme, further supporting councils in maintaining and upgrading community assets and local roads. The Road Safety Programme is also being extended to 2022 and 2023, with additional funding of $1 billion for projects that will improve roads and save lives. This brings the total investment by the Government in these two stimulus programmes to $5.5 billion since the start of the COVID-19 pandemic.

The recent massive funding and investment in infrastructure are what convince us that the domestic commodities and materials sector will likely see future earnings growth and therefore outperform other sectors in 2022.

Three top stocks to buy in 2022

These are three stocks in the commodities and materials sector to consider buying in 2022.

Korvest Ltd. (ASX: KOV)

Korvest principally engaged in the industrial products manufacturing business. The group has two reportable segments: Industrial Products and Production. The Industrial segment includes the manufacture of electrical cable, support systems, steel fabrication and access systems. This business arm also includes the sale, hire, and repair of high torque tools. The production segment provides hot dip galvanizing services.

The company derives most of its revenue from the Industrial products segment.

We like Korvest. It is a rock-solid company with a market capitalisation above $70 million. The company exhibits a robust balance sheet geared towards growth. More importantly, Korvest reported several years of steady earnings growth, but not only that. Korvest is also profitable with a net income that is also in the growth territory for many years. Furthermore, the business environment for Korvest is improving. Hence, the Government has recently injected a record $110 billion 10-year infrastructure pipeline along with an additional $15.2 billion over ten years to develop roads, rails, and community infrastructure projects across Australia. These projects will beneficiate Korvest long-term earnings growth.

Korvest is a stable business and the leading infrastructure provider. The recent government’s $110 billion 10-year infrastructure pipeline will likely propel Korvest’s earnings over the next few years. It has already started as the company has seen record levels of work on hand since the beginning of this year.

At the time of writing, Korvest shares are changing hands at $7.25 apiece. Year-to-date, the infrastructure leading provider’s share returned an impressive 45%. Korvest shares continue to climb higher as the company has recently raised its Fiscal H2 Guidance. Since last month, KOR stocks gained nearly 17%.

Lynas Rare Earths Ltd. (ASX: LYC)

Another stock we like is Lynas Rare Earths. After a stellar run so far this year, it might be time to consider adding or increasing the number of Lynas shares in your portfolio for 2022.

Hence, the Lynas share price has been a top ten performer of the ASX 200 over the past twelve months. However, with the new year drawing closer investors are eyeing off what performance might look like for the year ahead. Despite the rare earths mining company anticipating significant demand growth for the magnetic commodity, analysts are divided over the upside potential for the Lynas share price in the coming year.

We are quite positive regarding Lynas potential. Hence, it is the second-largest producer of separated Rare Earths in the world and has a proven track record. Furthermore, the company has revealed its 2025 growth plan, which is an ambitious target, yet realistic. With Rare Earth metals and the necessity to have a producer outside of China is becoming extremely important. Indeed, Lynas stands to benefit and remain a leader in this space. The company is at the intersection of what will be the biggest challenge ahead for every nation on the planet, geopolitical risk, and the inevitable world transition to a net-zero economy.

These two major catalysts could further secure Lynas to remain for a long time the largest producer of rare earth minerals on Earth. Currently, China accounts for at least 80% of the global production of the mineral. Given China’s history of using trade as a weapon, several countries are now seeking rare earth supply chain security, for which China controls global trade. This monopoly is a risk for most countries in terms of both military and domestic supplies. The need from western countries to secure and develop the security of supply is also underpinned by the forecast increase in demand, largely due to the adoption of green technologies. These techs require a large quantity of rare earth. As there is virtually close to no competition outside of China, therefore, we think Lynas could considerably grow further by the next few years.

DevEx Resources Ltd. (ASX: DEV)

The DevEx Resources share price had a tough month despite no news from the company. In fact, DevEx has not released any price-sensitive announcements to the market for more than a month. Yet the DevEx share price finished well in the red since last month, down 9.09% to 50 cents.

Let’s look at what might have weighed on the company’s shares recently.

DevEx is a mining exploration company digging for gold, copper, uranium, and other metals. The company’s major focus is its copper and gold discoveries in the Lachlan Fold Belt region of New South Wales. It also has interests in the nickel-copper-PGE exploration in Julimar, in Western Australia.

The Gold index (ASX: XGD) dropped by almost 9% by market close today. For perspective, the Materials sector finished at a marginal 0.13% higher.

DevEx’s last price-sensitive announcement to the market was back on 10 November. It was an update on the completion of two diamond drill holes at the Sovereign Nickel-Copper-PGE Project in Western Australia. The discovery was well received by investors and led to them snapping up DevEx shares.

Since that time, the directors of the company have been involved in several share transactions.

Most of the recent transactions were due to the exercise of options. Although, two buy transactions by Tim Goyder, the Chairman of the company was worth a total of around $335 thousand, were on-market trades.

In total since the last month, DevEx’s directors purchased more than $1.1 million worth of shares.

Overall, the company reported a positive year including an increase in market capitalisation and positive developments on several exploration projects.

Despite the recent plunge from its all-time high, the DevEx share price has rocketed 156% in the past 12 months.