William Davies, Deputy Global Chief Investment Officer at
Columbia Threadneedle Investments, outlines his outlook for
2022:
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William Davies, Deputy Global Chief
Investment Officer at Columbia Threadneedle Investments, predicts
2022 will be a year of change (Photo: Business Wire)
- The economic backdrop through 2022 may present opportunities
for investment. We expect the recent divergence of performance of
growth versus value companies will become more modest.
- We will continue to favour quality companies which demonstrate
good long-term returns and consideration of Environmental, Social
and Governance factors, utilising our investment research
capabilities.
- Opportunities to invest in Emerging Markets both for equities
and fixed income will be a point of focus and equities overall
should remain favourable.
- We believe 2022 will be a strong year for “rising stars” in
fixed income as many high yield companies achieve investment grade
status.
Interest rates have been historically low for more than a
decade, dampened by the flood of monetary stimulus introduced in
the wake of the global financial crisis. In 2022 we expect this to
change. As we move towards economic recovery from the Covid-19
pandemic, next year will be marked by a role-reversal in monetary
policy: crisis support, stimulus and spending replaced by recovery,
repair, reduced fiscal stimulus and a return towards “normal”.
Political compromise will be key, not least in the US, as
governments tackle the transition. As the support for asset prices
is withdrawn, active management – unearthing companies with the
enduring qualities that will help them navigate volatility – will
be essential to success in 2022.
Inflation: No time to panic
Earlier in 2021 we predicted that the reopening trade, coupled
with supply chain issues, would create a transitory inflationary
environment, which it has. While this transitory period is lasting
longer than anticipated, our view remains that inflation will
moderate, as we go through 2022.
Helpfully, central banks continue to look through inflationary
pressures; for example the US Federal Reserve has not appeared
overly concerned by higher and persistent US inflation, which in
previous cycles would have been perceived as a major headwind.
Investors and markets, too, are fairly sanguine. Equity markets are
at highs, buoyed in some areas by strong M&A (most obviously in
the UK), while the steepening and flattening yield curve has been
interesting to watch without causing as much consternation as we
might expect. This is in stark contrast to previous talk of shifts
in monetary policy in 2013 and 2018 which induced negative market
reactions, not least the taper tantrum. Now, the market feels more
poised, having waited so long for clarity. This makes us more
confident for 2022, albeit in a slowing growth environment.
One reason we believe inflation will ultimately fall in 2022 is
due to improvements in the supply chain. Regardless of whether you
believe Covid or other structural and political factors (in Europe
especially) are to blame, many of us underestimated the degree to
which the supply chain would impact the corporate backdrop. If
overordering then falls, there remains the risk of an inventory-led
recession in some areas, notably automobiles and semi-conductors,
as manufacturers who underestimated order levels during the
pandemic have depleted inventories to cope. Indeed, recent
estimates from industry analysts see semiconductor shortages
extending into 2023.
But despite the ongoing challenge of disruption at transport
hubs and a shortage of labour, we have seen recent signs of
improvement. In some sectors, notably retail, companies continue to
benefit from a less concentrated and more agile supply chain, while
manufacturers, transporters and retailers are all working hard to
make up ground lost in 2021 against steady consumer demand. It is
our belief that the supply chain headwinds will continue to become
less dominant in 2022, but it may well be towards the latter half
of the year before the positive impacts are felt.
Quality will out
We have seen good earnings recovery this year, a reflection of
relatively strong balance sheet management by corporates, with
stricter cost controls and strong discipline around dividends and
share buybacks. The reopening trade and enduring rebound in demand
has resulted in heightened cash flows which have boosted corporate
coffers, giving companies the tools to reduce leverage.
But given those supply chain bottlenecks and the persistence of
inflation, it will be harder for companies to beat forecasts in the
way they have in 2021, at least in the short term. For companies,
we anticipate next year will be a return to the familiar cycle of
earnings disappointment as opposed to positive surprises.
In previous cycles when the yield curve has flattened, the
impact on equities has seen investors seek quality companies that
could survive any impending rates shock. As we head into 2022 we
have seen the yield curve steepen, flatten and rise across the
curve again, and that has led to a more mixed scenario in terms of
what is leading the market – I do not see that changing in the
short term, but some areas that outperformed more recently might
struggle, such as “meme” stocks – those that become popular among
retail investors through social media platforms. The companies we
like – quality businesses with solid balance sheets and competitive
advantages – stand a better chance of weathering volatility.
Fixed income: credit valuations leave little room for
error
Investors flooded back into the bond market in 2021, riding the
liquidity wave that made most risk assets more attractive. But
valuations as a result are elevated, and we are wary of assets that
are less liquid than others; on a global basis this would include
structured credit and municipal bonds. With passives tracking their
way towards indices that contain many over-leveraged entities, we
feel an active approach will bear fruit in 2022.
Given what we believe inflation will be present for longer,
alongside the withdrawal of stimulus, one might expect bond yields
to move higher in 2022, which is not a terrific outlook. But as
companies move back to a traditional expansion phase of the
business cycle, our active targeted approach, focusing on improving
corporate and consumer balance sheets paired with a “smart” focus
on cost management, will lead to better outcomes in 2022. Recently
we have seen elements of spreads widening more at the weaker end
than in the investment grade (IG) universe, which is what one would
expect in a slowdown. If this continues we might consider IG more
attractive than high yield, although “rising stars” remain of
interest to us. And if any slowdown is more severe than we think,
we would expect greater support for government bonds.
Equities: There is no place to hide
It will be harder for companies to beat forecasts in the way
they did in 2021, at least in the short term. In fact, I expect a
greater variation in equity results through the year, and that
environment may present opportunities for active investors. The
continuing reopening trade (and an environment of above average GDP
growth) presents opportunities for cyclical outperformance,
particularly in the first half of the year, but even this play will
have uneven winners and losers. As stated, we believe quality will
out in the long term. By quality we mean companies with solid
balance sheets, strong competitive advantages and strong
sustainability credentials. Regardless of region, it is our belief
these companies will survive any slowdown or volatility in
2022.
Regions
Looking regionally, many investors have turned away from China
in droves this year because of its well-publicised regulatory
crackdown coupled with an imbalanced property market. I recognise
the concerns about regulation, not to mention outbreaks of “Delta”
Covid strains, extreme weather affecting food production and
transportation, and slowing growth. But China recovered first from
Covid, and did so with a tighter policy framework than other
regions. While growth in the country is of major concern, to my
mind that increases the likelihood of Chinese authorities providing
stimulus in 2022 – so I have a balanced view. There is opportunity
in China (and the rest of the emerging markets universe) but it
requires fundamental research and a bottom up approach -- building
portfolios company-by-company rather than a thematic approach.
In Japan, Prime Minister Fumio Kishida does not represent a
positive catalyst in the way Abe did. Without this political spark
and the expectation of meaningful change, Japan has become a less
exciting region for us as investors, notwithstanding improvements
in supply chains that will help the country’s industrial nature.
That said, as active investors we are not devoid of opportunities
and there is often more breadth in the Japanese market than we give
it credit for, not least in the technology and service sectors. The
latter is unusual given Covid, but there are ongoing initiatives
designed to improve productivity that are unearthing opportunities
for us.
The UK savings industry has typically been invested to the tune
of 60% in sterling-based assets, but recently domestic investors
have looked more globally for risk-adjusted returns. This has been
the right call given the UK equity market has been a serial
underperformer, and continues to be hit by lower flows. But
corporate entities with deep pockets do not care about flows; they
care about identifying cheap and undervalued assets they can
acquire – opportunities which are plentiful in the UK. It is
possible to over-emphasise the extent to which Brexit is playing a
part in the UK and European economies. What we do know is that the
UK is a less open economy than it was five years ago – and that
will continue to be a factor, creating both opportunities and
challenges.
Looking to Europe, we expect strong growth, albeit with the
potential for supply chain shocks, already evident in the lack of
HGV drivers and reduced labour pool. These factors will likely lead
to higher than anticipated inflation and peak stimulus. There is
also a theme of change in the region: Angela Merkel in Germany
remains a strong presence, but is preparing to step down – a
Germany led by the SPD’s Olaf Scholz along with the Greens and FDP
could see more volatility and a preponderance of stimulus. Added to
that we have a presidential election in France in April – and
French elections are notoriously difficult to predict. As events
these will be market influencers, but to what extent it is
difficult to estimate.
Conclusion
2022 will be a year of change. We have had an environment of
fiscal and monetary stimulus for some time, and when taps are kept
open investors do not mind how much governments and central banks
spend or how big a national deficit is. But change is coming,
however unwanted it might be, and we face a world of economic
repair in which markets and investors must consider the impact of
reduced fiscal stimulus.
As active managers we are well-placed to navigate this changing
world. Our expertise is diverse, with more than 650 investment
professionals sharing global perspectives across all major asset
classes and markets. It is that expertise, our culture of
collaboration, as well as a focus on research intensity, that
historically allowed us to maintain strong performance over the
long term. This will continue in 2022.
Notes to Editors
About Columbia Threadneedle Investments
Columbia Threadneedle Investments is a leading global asset
manager that provides a broad range of actively managed investment
strategies and solutions for individual, institutional and
corporate clients around the world.
Together with BMO GAM (EMEA) we have more than 2500 people
including over 650 investment professionals based in North America,
Europe and Asia1. We manage £530bn / €617bn / US$714bn2 of assets
across equities, fixed income, multi-asset, solutions and
alternatives.
Our priority is the investment success of our clients. We know
investors want strong and repeatable risk-adjusted returns and we
aim to deliver this through an active and consistent investment
approach that is team-based, risk-aware and performance-driven. Our
investment teams around the world work together to uncover
investment insights. By sharing knowledge across asset classes and
geographies we generate richer perspectives on global, regional and
local investment landscapes. The ability to exchange and debate
investment ideas in a collaborative environment enriches our teams'
investment processes to ensure the best insights are applied to
portfolios. More importantly it results in better informed
decisions for our clients.
Columbia Threadneedle Investments is the global asset management
group of Ameriprise Financial, Inc. (NYSE:AMP), a leading US-based
financial services provider. As part of Ameriprise, we are
supported by a large and well-capitalised diversified financial
services firm.
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including BMO GAM (EMEA) 2 As at 30 September 2021
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