2022 Investment Outlook

Video script

In this video we are reviewing our outlook for 2022 with five points we want to highlight.

Firstly, our outlook for 2022 is positive given the supportive backdrop for equity markets, supported by a more prolonged positive economic cycle, although the Omicron variant has the potential to disrupt.

We do think that we are facing a more prolonged positive economic cycle, supported by the sizable infrastructure spending that has been unveiled.

Secondly 2022 will confirm whether inflation is frictional and therefore transitory whilst we believe taxation is a low probability event the frictional inflation has the potential to put pressure on margins however and investors need to bear that in mind.

As a result, thirdly we want to focus on companies with more consistent growth profiles, after a strong year of recovery. Given the higher equity valuations we expect 2022 to be a year of lower returns for investors, after what has been a strong 2021, for equity returns globally.

The lower earnings gross expectations in 2022 and risk of margin pressure from the higher frictional inflationary pressures do emphasize the need to focus on companies with superior pricing power and therefore lower downside risk margins and companies offering more consistent gross profiles.

Fourthly the sustainability focus will remain high in the market in the post-pandemic recovery, coming on the heels of the COP26 summit, which has increased focus on sustainability in particular.

And fifth thematics opportunities remain plentiful in a world transitioning towards sustainability.

Our three mega trends which are (i) Demographic Changes, (i) Future of Technology and (iii) Resource Scarcity provide us with great opportunities to capture long-term structural growth themes.

These are well aligned within a world transitioning towards a more sustainable future, with Demographic Changes aligned with sustainable living, Future of Technology aligned with decarbonization and Resource Scarcity aligned with climate change.

Finally there are risks for investors that we need to bear in mind, notably in terms of execution risk on monetary policies, which could bring volatility.

Policy implementation on infrastructure spending, given how critical that spending is to the economic growth. There are also other risks such as corporate tax rates increasing, putting downward pressure on earnings.

Localized pandemic relapse risks putting pressure on economic momentum and also further exacerbating supply chain disruptions and stronger and more prolonged frictional infection pressures, which could lead to more pronounced margin pressure for corporates.

And finally, geopolitical risks need to be born in mind with tensions potentially becoming more open notably in terms of China versus rest of the world.

We predict an ever more disruptive decade continuing to affirm itself in 2022 with many risks of disruptions for existing business models in a rapidly transitioning world but also many areas of opportunities coming from increased investments and innovation in areas that enable a faster transition towards a more sustainable world.

Thank you for listening it's there it’s Zehrid Osmani.

2022 Outlook - Key Points

A supportive backdrop for equity markets driven by a prolonged positive economic cycle – although the Omicron variant has the potential to disrupt

We believe that economic momentum should remain supportive in the medium term. This is partly related to supportive policy initiatives, notably the infrastructure programmes that have been announced globally but not yet deployed. Given the magnitude of these programmes, and the longer duration of their deployment, we are of the view that we are facing a more prolonged positive economic cycle, which should remain supportive of equity markets.

With the higher equity valuations and a strong 2021 for equities globally, we expect 2022 to be a year of lower returns and higher volatility for investors.

Monetary policy normalisation will bring continued volatility and will maintain the bull-bear debate between growth and value.

The Omicron Covid-19 variant has the potential to disrupt both economic momentum and monetary policies, should it lead to renewed significant lockdown measures.

2022 will confirm whether inflation is frictional or structural

Inflation will remain an important talking point in 2022, with the bull-bear debate continuing into summer when we believe inflationary pressures will subside. Wage inflation remains the important measure to watch as it has the potential for a more long-lasting impact. We believe stagflation is a low probability given the supportive economic backdrop, although the Omicron variant has the potential to increase this risk.

Focus on companies with consistent growth profiles after a strong year of recovery

Lower earnings growth is expected in 2022 following the strong 2021 recovery. There is a risk of margin pressure from the higher frictional inflation, emphasising the need to focus on companies offering consistent growth profiles, these have superior pricing power and therefore lower downside risk to their margins.

Sustainability will remain an area of focus in the post pandemic recovery

Following the COP26 summit, we will see an ongoing trend towards more sustainability, given the ongoing need to deliver on the ambitious and necessary net zero targets. As this sustainability focus continues, it will bring more regulatory requirements and a higher cost burden notably on the most polluting and high carbon emitting companies and industries. It will also bring a higher level of investment into green initiatives and solutions driving momentum in innovation and increasing potential opportunities for long-term investors.

Thematics opportunities remain plentiful in a world transitioning towards sustainability

Our three mega-trends, (i) Demographic Changes, (ii) Future of Technology, and (iii) Resource Scarcity, provide us with opportunities to capture long term structural growth themes, which are well aligned within a world transitioning towards a more sustainable future. Demographic Changes are about Sustainable Living, Future of Technology is about Decarbonisation, and Resource Scarcity is about Climate Change. Within these megatrends, there are thematic opportunities with supportive structural growth prospects in:

• Infrastructure across green energy, energy efficient buildings, electric transportation, 5G telephony, and healthcare; and
• Technology in cloud computing and cyber security, robotics and automation, and quantum computing.

Many risks for investors in 2022

There are many risks that investors need to take into account as we enter 2022. A loss of momentum in infrastructure spending is an important risk, given the impact of such spending in helping economic growth. Monetary policy mistakes are another risk, which could unnerve investors and bring more volatility in terms of style rotations between growth and value as yield curves shift around.

Other risks include:

• corporate tax rates increasing, putting downward pressure on earnings
• localised pandemic relapse risks putting pressure on economic momentum and further exacerbating supply chain disruptions
• stronger and more prolonged frictional inflationary pressures, leading to more pronounced margin pressure for corporates; and lastly
• geopolitical risks, with tensions potentially becoming more open notably in terms of China versus Rest of the World.

Finally, we predict an ever more disruptive decade continuing to affirm itself in 2022. There are many risks of disruptions for existing business models, in a rapidly transitioning world, but the increased investments and innovation enabling a faster transition towards a more sustainable world will create many areas of opportunity for long-term investors.