As the world continues to recover over the coming year, a cautiously optimistic outlook seems warranted. Nick Samouilhan, portfolio manager at Wellington Management, highlights five trends should shape the next 11 months for investors.
The coming year should welcome in a post-pandemic recovery — albeit with many fits and starts along the way. Covid vaccination rates and other telling numbers including case counts, hospitalisations and virus-related deaths suggest that the global pandemic may finally be winding down. In addition, many world economies are growing, and are already on the road to recovery.
Collectively, however, we’re not quite there yet. With its multiple potential variants, the virus has proven difficult to entirely vanquish. And even if next year does bring meaningful progress, it will not be a truly post-Covid world, as the virus will most likely remain in global circulation for years to come. Nor will the economic and other improvements we anticipate be sudden or universal. Many countries still lack adequate vaccine coverage, whether due to ongoing supply issues or vaccine hesitancy among their populations. Lingering challenges around international travel and other activities may well persist for the foreseeable future, making a full reversion to pre-Covid conditions an unlikely prospect anytime soon.
Covid has undeniably reshaped our world, accelerating some long-term trends, blunting or stalling others, while ushering in wholesale, lasting changes to how we live, work and travel. It has hastened the onset of structural changes to how we operate and what we value. These types of changes are like shifting tectonic plates: hard to see on a day-to-day basis, but powerful over the longer term, and ultimately more significant than anything else.
Despite the many unknowns still facing our world, here are five investment essentials that should play a more prominent role in investors’ toolkits as we march inexorably towards a brave new future.
1. Adapt to rising inflation
The supply-chain bottlenecks that are plaguing much of the world today are unlikely to be resolved quickly. Next year could easily see mismatches between supplies of many goods and demand for said goods continue, or perhaps worsen, as one by one countries reopen. Since supply constraints have been a key driver of rising inflation, the most likely outlook for 2022 is that it will be more elevated than it has been for years. This will likely lead to higher bond yields, especially as major central banks prepare to taper their quantitative easing programmes and lay the groundwork for future interest rate hikes.
Rising inflation and higher bond yields have potential implications for other asset classes, but they will offer opportunities for investors in more flexible fixed income funds, as well as global macro strategies and those with an explicit mandate to mitigate the effects of inflation, like purpose-built multi-asset portfolios.
2. Take a deeper dive into China
China’s extraordinary development over the past few decades demand it’s a topic of investment discussion and where appropriate, a standalone portfolio allocation or the main component of an investor’s total EM exposure. Granted, this is typically easier said than done, given the complexity of the Chinese economy and the systemic economic, societal and structural changes that are still ongoing in the country. However, with such seismic change comes opportunities for investors. However, China’s recent regulatory announcements and their negative impact on some Chinese assets have highlighted the need for investors to properly understand these opportunities.
With the right approach, we believe investing in China will remain an attractive investment idea in 2022 and beyond, despite recent bouts of market volatility.
(Figure 1). Consider either a dedicated China fund or a more diversified EM strategy.
3. Play the ‘net-zero game’
With more pronounced changes to the world’s weather patterns becoming evident over time, many governments are moving past mere verbal commitments towards concrete regulatory steps and investment programmes aimed at combatting climate risks. Our global energy transition will need capital investments to be successful, and supporting what is likely to be a decades-long phenomenon with transformative potential will become increasingly mainstream next year.
Climate mitigation and adaptation strategies are one way to capitalise on our decarbonisation agenda, but investors should also not underestimate the value and potential benefits of ESG integration in their investment portfolios.
4. Go long on secular thematic trends
Since the arrival of COVID, several secular thematic trends have gained momentum and created compelling new investible opportunities. For example, enterprise intelligence has been spurred on by mounting wage inflation and labour shortfalls, which are pushing many companies towards automating more tasks and making greater use of cloud-based solutions. Such trends are not only happening in developed market economies, but also in emerging markets (EMs).
Investors can target theme- or sector-specific strategies tied to the trends that most interest them. However, thematic investing of this sort is not the same as index investing. Investors must do their homework to ensure they’re buying what they really want.
5. Focus on fundamentals and quality
An important consideration is the re-emergence of individual company quality as a catalyst for asset pricing. As the pandemic gradually recedes, we expect to see on one hand, growing divergences between well-managed companies that look positioned for robust growth, and on the other hand, companies whose poor management and shaky fundamentals were largely obscured by Covid turmoil.
Finding quality companies that are no longer overshadowed by the macro forces of Covid, including economic lockdowns and government policy support, will be an increasingly desirable investment strategy next year and beyond.
(Figure 2). Investing in quality growth funds is one potential solution.
*Nick Samouilhan, multi-asset strategist and portfolio manager, Wellington Management
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