2022 MARKET OUTLOOK Risk. Return. Impact - NEI Investments
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
2022 MARKET OUTLOOK Risk. Return. Impact.
CONTENTS
Introduction............................................................................................................. 3
Risk. Return. Impact. by asset class........................................................................ 4
Global fixed income: Amundi Asset Management..................................................... 5
Global high yield fixed income: Principal Global Investors ...................................... 6
Global impact bonds: Wellington Management......................................................... 8
Canadian equity: QV Investors.................................................................................. 10
U.S. equity: AllianceBernstein.................................................................................. 11
Global equity: Baillie Gifford (growth)....................................................................... 14
Global equity: Federated Hermes (core).................................................................. 16
Global equity: Impax Asset Management (thematic)............................................... 18
Inflation perspectives............................................................................................ 20
Fixed income.............................................................................................................. 21
Amundi Asset Management............................................................................... 21
Principal Global Investors.................................................................................. 21
Wellington Management.................................................................................... 22
Equity......................................................................................................................... 22
QV Investors........................................................................................................ 22
AllianceBernstein............................................................................................... 23
Net zero outlook.................................................................................................... 24
Fixed income.............................................................................................................. 25
Wellington Management.................................................................................... 25
Equity......................................................................................................................... 28
Baillie Gifford...................................................................................................... 28
Federated Hermes............................................................................................. 30
Impax Asset Management................................................................................. 32
Summary................................................................................................................... 33
»2 2022 market outlookIntroduction
INTRODUCTION
The pace of change that we have witnessed over the with thoughts on what our funds can do to address
past two years has been stunning. Developments that climate change.
have typically taken a decade to play out have been
condensed into mere months. As we look back at 2021 There is no question the investment landscape will be
and to the year ahead in our 2022 Market Outlook, a changing in 2022. There are many issues investors will
key lesson I take away is that urgency, focus, and need to navigate through. Central bankers have
investment can create profound change, a clear already set the stage for less accommodative policies
testament to human ingenuity. going forward. How will this impact returns, given that
many asset classes are already at stretched
For example, let’s look at technology. Economic valuations historically? What will the COVID-19 variant
shutdowns meant businesses didn’t have years to plan known as Omicron do to our market projections? How
and execute new digital strategies. But with focus and persistent will inflationary pressures be, and how
investment, the digital transformation of our economy should investors be protecting their portfolios in a
happened. Moving to health care, the needs of the higher-inflation environment? Climate change creates
pandemic created an environment of urgency and risks, but also opportunities for investors, and there is
action. Thanks to advancements in mRNA research, much we can do to accelerate the transition to a net
Pfizer and Moderna were able to compress the vaccine zero emission economy.
development cycle from 10-plus years to just one year.
We encourage you to explore the many deep insights
Bold actions were taken to help the economy as well. for investors in the pages ahead. At NEI Investments,
Governments and central bankers around the world we see risks to our forecasts increasing, and with that
unleashed record amounts of monetary and fiscal comes the potential for increased volatility. However,
stimulus to ensure that pandemic-damaged our outlook for the year ahead remains cautiously
economies would have enough support to ensure optimistic. Stretch that time horizon out to the next
there were no permanent loss of jobs or economic decade, and that optimistic outlook increases
output. Today, Canada has numerically recovered all substantially. In the words of our global growth
jobs lost during the pandemic. U.S. consumer manager Baillie Gifford, “The potential for a few
spending has now fully recovered and is above pre- innovative companies to drive progress as well as
COVID trends. Inflation, which has spent decades on a stock market returns has perhaps never been greater.
declining path, has broken to the upside as well. As investors we are in the privileged position to
contribute meaningfully to solving society’s greatest
So, what’s next? In this report, we asked our sub- challenges and we believe over the long term the
managers for their views on what will change in the approach will deliver sustainable and superior returns
investment landscape in 2022, the risks and return for our clients.” I cannot think of a better way of
opportunities for investors, and what impact our encapsulating the combined challenges and
investment dollars can have on solving ESG issues opportunities that lie ahead for us all.
like climate change, biodiversity, human rights,
and governance. Wishing you all a safe, prosperous, and impactful 2022.
We have organized the report into sections: the first is
by asset class, including fixed income (global bonds, John Bai, CFA
high-yield bonds, global impact bonds) and equity Senior Vice President and
(Canadian, U.S., global, and growth equities). We also Chief Investment Officer
squarely address a key concern for most investors,
with a special section on inflation. Finally, we wrap up
2022 market outlook 3«RISK. RETURN. IMPACT.
BY ASSET CLASS
RISK
RETURN
»4 2022 market outlookRisk. Return. Impact. by asset class
Global fixed income: Risk
Amundi Asset Management The two risks to keep an eye on are:
How do you see the investment landscape 1. Higher-than-expected impact coming from China’s
real estate market, which would weaken an already
changing in 2022?
downwardly revised growth outlook for China and
Next year, major central banks will start unwinding Asia, and potentially for the global economy.
the unprecedented level of monetary policy
2. Inflation continuing to surprise on the upside,
accommodation. Inflation has surprised to the upside
forcing the Fed to hike rates faster than expected
and has been coming in above consensus and central
while taking the federal funds rate significantly
bank forecasts for most of this year, whilst measures
above neutral, tipping the economy into a major
of long-term inflation expectations are generally
slowdown or recession.
more consistent with (and in many cases above)
inflation targets. This is not a surprise given the
degree of fiscal and monetary coordination during Return
this pandemic. We believe credit will continue to deliver positive returns
With demand clearly exceeding supply, monetary as spreads will remain contained by an improved
authorities will need to adapt and remain flexible to growth outlook. Corporates have managed to pass
address what is becoming a more permanent shift in through price pressure to consumers, keeping profit
inflation, particularly in the U.S. and U.K. margins under control. Financials and subordinated
RN
debt in particular remain our preferred choice.
There is also the prospect of more fiscal stimulus
from the U.S. (President Joe Biden’s infrastructure Emerging-market (EM) high-yield hard currency bonds
plan has been approved and there is more on the are also likely to be supported as real yields in core
pipeline), and the E.U. is set to accelerate the bond markets will remain negative and commodity
deployment of its new recovery fund. Granted, most prices elevated. Moreover, some EM central banks
of the fresh fiscal stimulus is aimed at boosting have proactively tightened monetary policy, which
potential output, limiting the long-term impact on coupled with attractive bond risk premia will present
price dynamics, but it can still exacerbate price good investment opportunities in the next year.
pressure in the coming years. While China’s economy With the Fed likely to start hiking rates in 2022, and
has slowed, developed-market GDP is expected to potentially accelerating its tapering of quantitative
grow above trend in 2022 and many economies will easing, volatility is likely to increase. This will create
have exceeded pre-COVID real GDP levels in 2022. opportunities in fixed income as the market has not
The U.S. is likely to be running a positive output gap fully priced this in. Protecting the portfolio from a
that hasn’t been observed in decades. higher-than-anticipated yield environment remains
Therefore, for the first time in decades investors attractive, either via options on U.S. Treasury futures
face an investment landscape that places inflation as and/or U.S. inflation-linked bonds.
a key risk. How central banks, and particularly the There are relative market opportunities on yield
Fed, deal with the various tradeoffs will be critical for curves, with the U.S. Treasury curve likely to flatten
asset returns and volatility. Within this backdrop, and that of the eurozone likely to steepen as the
there are plenty of opportunities in fixed income and European Central Bank pushes back rate hike
foreign exchange markets; the key is to be selective. expectations for next year. This should also support
corporate and sovereign spreads in the eurozone
periphery and favour the U.S. dollar versus the euro.
2022 market outlook 5«Some emerging-market currencies in high-yield securities will likely produce negative returns. High-
countries are attractive versus fundamentals and yield bonds, due to their higher coupons and shorter
present decent carry opportunities. durations, have historically been able to offset periods
of rising rates and produce superior positive returns.
Impact Inflation will continue to be a primary economic topic
of conversation, though we see supply chain
We saw incredible momentum both on the supply and improvements in 2022 as the world returns to a more
the demand side, with record levels of issues on GSS synchronized post-COVID state. What will not change
(Green, Social, and Sustainable bonds) both from in 2022 are the expectations of continued earnings
public (governments, supra, and agencies) and private growth by corporations, continued improvement in
entities (from banks to utilities, from IG rated to now leverage metrics, and declining defaults. Estimates
some high-yield names). The eurozone has been and for growth remain strong and the recovery in business
will remain one of the biggest issuers as part of the investment and continued improvement in labour
toolkit will be financed by social bonds and green productivity suggest a robust economy. Governments’
issuances. We expect to be quite active on the race to continued focus on medium-term objectives such as
net zero and see many companies committing to rebuilding infrastructure, tackling climate change,
emission targets. Green bonds but also sustainability and addressing social inequality will all be positive for
linked bonds are quite interesting as a way to showcase credit. The landscape still looks good for spread
for an issuer a commitment to reach specific KPIs products to significantly outperform risk-free assets.
(like lower carbon intensity). This was the scenario investors experienced in 2021,
and it will be in sharper focus in 2022 as the Fed not
On climate and energy transition, from carbon intensity
only tapers but tightens monetary policy.
to temperature, we have many indicators that help us
assess each issuer and give a complete 360 degree
view on companies. We still think that some risks are Risk
not fully priced here and don’t view utilities for Although our fundamental global outlook remains
example as the traditional place to hide but still as a quite strong and there are few signs of late-cycle
sector that is at the epicentre if the energy transition excesses, there are many uncertainties on the horizon
and that offers few risk/rewards at least on the senior that could cause bouts of volatility. For example, will
part of the capital structure. We like to bias our there be a COVID variant that grinds the economy to
portfolios toward highly rated companies while halt? In June and July of this year, we saw rising
maintaining good level of carry. infections from the Delta variant, but there was very
little impact on the markets. If a COVID variant rises
up again that closes economies for a time, it will be
Global high yield fixed income: very negative for high-yield fixed income. Another
Principal Global Investors uncertainty is if investors see a much more hawkish
stance from central banks, especially the Fed, in
How do you see the investment landscape response to the highest inflation in three decades. In
changing in 2022? this scenario, you will see quicker interest rate hikes,
causing a slowdown in economies that could harm
The landscape in 2022 will look different in many ways, high-yield issuers. Also, will the uncertainty in China
as it will now be two years since the pandemic began. from the crackdown on property developers spill over
The immense fiscal and monetary stimulus seen to other economies? Our base case scenario is that
during this time will slow down, and we expect the Fed China will contain the fallout in the property sector,
to begin tightening at some point in 2022. Against this but this is a risk. So far, it appears the country is
backdrop of a rising-rate environment, higher-quality managing the process, but it is one of the biggest
bonds such as Treasuries and investment-grade financial challenges they have faced in years.
»6 2022 market outlookRisk. Return. Impact. by asset class
Return Finally, we see opportunities in “green bonds” as they
will continue to perform well into 2022 with strong
With credit conditions remaining supportive even as investor demand for loans that help advance global
the Fed begins the tapering process, we still see value sustainability goals while simultaneously rebuilding
in reopening sectors such as travel, transportation, the economy.
and other cyclical industries. We continue to see
opportunities in these sectors despite spreads Impact
tightening at or near post-financial-crisis peaks thanks
to expectations of very low default rates and these More than at any time in our careers, we have the
sectors trading at slight spread advantages. Many opportunity to make an impact now. One opportunity,
travel and transportation names were investment- as mentioned earlier, is the growing prevalence of
grade names prior to the pandemic. Although spreads green bonds. Green bonds are increasingly being
on names such as United Airlines, Delta Airlines, or recognized by supranational organizations, banks, and
Carnival Cruise Lines are significantly tighter today corporations as an essential tool to finance climate-
than at the height of the pandemic, according to our related and other environmental projects. In its
analysis they still trade significantly wider than in simplest terms, a green bond is a conventional bond
2019, wider than other high-yield issuers and at with an environmentally friendly use of proceeds.
meaningfully more attractive levels than investment- Examples of green bond projects include renewable
grade credit. energy infrastructure, energy-efficient buildings, clean
transportation and waste management, and recycling.
Another opportunity we see is in the “fallen angels” As investors, we can allocate a portion of a portfolio to
(investment-grade issuers downgraded to high yield) green bonds to support positive climate change
that we expect to become rising stars in 2022. solutions without having to compromise the investment
Companies in the energy (Occidental Petroleum), food goal of optimal returns. In fact, issuance in 2021 is on
& beverage (Kraft Heinz), and automotive (Ford) sectors pace for a record year, as seen in the following exhibit,
are expected to transition to investment grade. and we expect 2022 to be more of the same.
Issuance of green, social, sustainability bonds growing on pace
$700
Green Bonds Social Bonds Sustainability Bonds
$600
Annual Issuance ($billions)
$500
$400
$300
$200
$100
$0
2013 2014 2015 2016 2017 2018 2019 2020 2021F
Source: Moody’s, September 30, 2021.
2022 market outlook 7«Another opportunity for impact is the improved focus tail risks. However, as we look across the fixed income
on company engagement. We don’t want to spectrum, we still see pockets of attractive value for
automatically exclude an investment in a company investors to consider, notably in some non-traditional
with a lower ESG score because there might be credit sectors. Our other quantitative indicators are
opportunities for alpha within that investment. The mostly quite positive at this time: corporate behaviour
new face of investing is not having to pick between remains generally conservative, monetary policy is
income or idealism. The new face of long-term still supportive (despite steps toward tightening), and
investing is the ability to get both. The focus on market technicals are strong, all of which keep us
engagement has become more acute and we have from advocating for more cautious portfolio positioning.
focused on educating companies on the growing The prospect of higher-than-expected, longer-lasting
importance that institutional and individual investors structural inflation suggests that major central banks
place on ESG factors. We have seen tangible evidence may feel the need to start tightening policy sooner
of changes at companies we are invested in due to rather than later. A potential policy mistake in the
this engagement, such as one company hiring a form of tightening too soon or too quickly could prompt
Diversity Inclusion Director and engaging in an us to adopt a more defensive risk stance in 2022.
environmental impact report.
Global impact bonds: Despite the planned tapering
Wellington Management of Fed asset purchases in
2022, monetary policy should
How do you see the investment landscape
changing in 2022? continue to provide an
The increase in yields over the course of 2021 puts
economic boost...
fixed income sectors in a better position to generate
positive total returns in 2022. We maintain a neutral
Risk
risk posture overall, having grown wary of some fixed
income exposures in recent weeks, particularly certain We believe the primary risk revolves around the shift
higher-yielding credit sectors. We modestly reduced to tighter global monetary policy. Other key risks that
risk recently, after having maintained a pro-cyclical bear watching in 2022 include:
risk posture over the course of 2021. However, we still
believe some spread sectors can benefit from • Chinese deleveraging—We expect to see persistent
continued above-trend global growth, underpinned by market pressure on the Chinese real estate sector
healing labour markets and an improving public health as the credit turmoil associated with Evergrande
backdrop. We suspect global inflation may prove more continues to unfold. However, we view the recent
enduring than the Fed and broad markets expect, even steps the Chinese government has taken to better
as some supply bottlenecks ease. Enduring inflation manage the sector as a potentially encouraging
would test the Fed’s patient resolve in removing policy sign for the future, including measures (such as
accommodation. Despite the planned tapering of Fed the “Three Red Lines” policy) aimed at deleveraging
asset purchases in 2022, monetary policy should to ensure sustainable longer-term growth. Near
continue to provide an economic boost, likely to be term, China’s economy and asset prices have been
augmented by additional fiscal stimulus measures hit by a convergence of external and domestic
(including the U.S. infrastructure bill). shocks, some of which have to do with the country’s
political calendar and its regulatory actions in
Regarding valuation, recently rich levels in many 2021. Fortunately, none of these shocks seems to
credit sectors could leave investors vulnerable to have derailed the development or longer-term
negative returns if markets encounter unanticipated momentum trends of the economy. We will continue
»8 2022 market outlookRisk. Return. Impact. by asset class
to assess whether fallout from recent events decrease. This is despite concerns around lofty
threatens normalization of economic conditions equity valuations. Sectors like high yield have
over the coming months. limited upside due to tight credit spreads, while
maintaining the usual credit downside. Equities, on
• New COVID-related disruptions—A new vaccine- the other hand, can continue to appreciate in a
resistant variant could force countries or large parts middle- to late-cycle economic scenario, while the
of countries to return to a full lockdown. Consumer convertibles themselves retain a bond “floor,”
spending has been buoyed by low interest rates, helping to mitigate potential losses. We also favour
government programs, and pent-up demand for convertibles because they offer the opportunity to
many activities, but a downside surprise regarding allocate to issuers that often aren’t available in
COVID-19 could weigh on confidence. other markets, particularly in the technology and
biotech sectors.
• Deterioration in credit metrics—Leverage metrics
have swiftly returned to pre-pandemic levels. Free
cash flow generation held up well through the Impact
shock as companies pulled levers to position
We are slowly emerging from the COVID-19 pandemic
conservatively. Corporate cash flows should be
to a world further burdened by socioeconomic
more stable going forward, given the less cyclical
inequities, which are especially pronounced in the
mix of sectors (more food & beverage, technology,
developing world. Given the blows delivered to small
and pharmaceutical companies) and banking
businesses and the increasingly crucial role of digital
regulation. Shareholder-friendly activities remain
connectivity in a socially distant environment, we are
low for now, but we will be closely monitoring
focused on identifying solutions within our Financial
whether merger-and-acquisition activity picks up if
Inclusion and Digital Divide impact themes, particularly
issuers look to take advantage of low borrowing
within emerging markets.
costs to diversify or increase the scale of their
businesses. With the global economic downturn brought on by
COVID-19, as well as the continuing shift of business
Return models online, small businesses and entrepreneurs
have lost portions of their customer bases and felt
A few credit sectors stand out to us as having a higher pressure to boost their online presence. To help
probability of generating excess returns in 2022: address this need, we have identified an issuer that
provides financial technology solutions that enable
• EM high-yield sovereign debt looks particularly
and lower the costs of ecommerce for small- and
attractive because it is one of the few sectors in
medium-sized businesses in Brazil. This issuer’s
which credit spreads are still trading wider than
financial technology-as-a-service platform is
their historical median levels. Granted, many EM
differentiated to service small businesses and
countries’ fundamentals have deteriorated
facilitates their ability to scale, making the issuer a
somewhat as a result of increased debt burdens
key actor to accelerate financial inclusion in Brazil.
amid the COVID crisis. On the other hand, global
institutional support has been forthcoming from the As work, school and life generally shifted online
likes of the IMF and World Bank. While as always, during COVID-19, access to reliable digital connectivity
we expect some idiosyncratic EM debt defaults, we increased in necessity and will continue to serve a
believe a carefully assembled basket of high- critical role in education and job training and access
conviction issuers should serve investors well over to information and services. In light of this trend, we
the medium term. have identified a telecommunications and energy
company within our Digital Divide theme which works
• Convertible bonds exhibit a trait that many other
to help rural communities participate in the digital
fixed income sectors lack right now: positive
economy by increasing connectedness in Costa Rica.
convexity, or increasing duration when yields
2022 market outlook 9«Percent of income loss by global income quintile due to COVID-19
Poorest Second Third Fourth Richest
0
-1
-2
-3 -2.6
-3.5
-4
-5 -4.9
-5.1 -5.1
-6 -5.7
2020 2021
-6.6 -6.7 -6.6 -6.6
-7
Source: COVID-19 leaves a legacy of rising poverty and widening inequality, World Bank Blogs, October 2021.
Our investment in this issuer highlighted another repeat itself, it does often rhyme. With many of the
impact area of focus, which is to invest in issuers that broader equity indices trading at lofty valuations, a
deliver their services sustainably. We invested in this strong margin of safety is likely to be an important
issuer’s sustainability-linked bond, whose coupon rate precursor to outperformance in a more challenging
is tied to the installation of smart electricity meters, go-forward environment for equities.
which can play a key role in increasing the energy
efficiency of electric grids. Risk
Risk seeking behaviour is alive and well. Initial public
Canadian equity: QV Investors offerings are coming to market at a blistering pace
and earlier-stage growth stocks with no income
How do you see the investment landscape generation but high hopes for a promising future are
changing in 2022? receiving hefty valuations.
While the global economy has continued to recover As we move further past the depths of the pandemic,
alongside ongoing vaccination efforts, inflationary the costs associated with stabilizing the economy
pressures and supply chain issues are beginning to are coming to the forefront. Many individuals and
temper near-term expectations. These forces will have businesses continue to struggle while labour
an impact on some of our businesses, but productivity shortages, inflation, and supply chain challenges have
gains and price increases should generally help to become prevalent. As governments attempt to secure
mitigate these risks. Stimulus efforts across the world new revenue sources to manage higher debt loads,
are focused on reducing the likelihood of a below- incrementally higher taxes and regulations may begin
trend recovery and avoiding what many developed to weigh on corporate profits.
markets saw after the global financial crisis.
With record highs in stock markets and record lows
Today’s investing climate in some respects reminds in interest rates, risk management may not be in
us of the tech bubble of the late 1990s, although the vogue but it is more important than ever. Now is not
fiscal and monetary backdrop is quite different today. the time for disciplined investors to throw caution to
Back then, growth at any price was in vogue, and less the wind while chasing short-term returns outside of
attention was on everyday businesses offering their core competencies.
valuable services. Although history doesn’t necessarily
» 10 2022 market outlookRisk. Return. Impact. by asset class
Return U.S. equity: AllianceBernstein
The current environment is creating opportunities for
many of our companies. Our energy holdings are How do you see the investment landscape
benefitting from strong supply-side discipline, and changing in 2022?
recovering demand has driven pricing to a multiyear
Are equity market gains sustainable? After a strong
high. Excess cash flows from this sector are now
run through October 2021, the risk of a correction
being consistently used to reduce debt and enhance
should not be ignored. However, we believe that stocks
returns to shareholders. Our consumer discretionary
still offer attractive long-term return potential that
holdings are also well positioned for strong consumer
can’t be sourced elsewhere and should prevail over
spending in the years ahead.
time, even if a short-term downturn materializes.
Our portfolios contain many world-class businesses
Global equity investors returned to buy at market dips
that generate strong cash flows and attractive
as better-than-expected earnings reports and
returns on capital. In many cases, we expect portfolio
economic data in the U.S. helped quell concerns over
holdings to ramp up dividends or share buybacks in
the possibility of a slowing economic recovery. Market
the next 24 months. We remain very selective on the
sentiment was buoyed by favourable third-quarter
businesses that enter our portfolios, including only
earnings results from a broad range of companies
those we believe to be enduring franchises at
driven by robust demand, strong corporate balance
attractive valuations. With this discipline, we continue
sheets, and resilient consumer activity. Positive
to see attractive risk-adjusted returns going forward.
earnings momentum outpaced inflation and
overshadowed ongoing concerns surrounding the
Impact coronavirus Delta variant, supply-chain disruptions,
The economic exposures and growth prospects within and a sharp increase in energy costs.
our portfolios are balanced and diversified, with many
real-life connections to our daily lives. Sustainable
franchises are often the best positioned to support Market sentiment was buoyed
their customers, employees, and society for the long
term. For example, the largest and most well by favourable third-quarter
capitalized holdings should be favourably positioned earnings results from a broad
to support the energy transition through research
and development, capital, and strategic imperatives. range of companies driven by
Other companies are well positioned to further global
goals of reducing emissions, through their existing
robust demand, strong
infrastructure and technical expertise. We maintain corporate balance sheets, and
ongoing dialogue with companies regarding their
sustainability priorities and evolution over time.
resilient consumer activity.
This type of portfolio is well-positioned to absorb After a period of underperformance for defensive
future uncertainties and unknowns, allowing us to stocks, a broadening market can represent real
capture relatively consistent earnings growth over time. opportunity. Defensive sectors continued to grow
Our experience shows that periods of low market earnings and cash flow during the period when the
confidence tend to serve as valuable opportunities for market chose not to reward them with higher share
our portfolios, as other market participants tend to prices. Simply put, there are some high-quality,
overreact or reduce exposure to quality enduring defensive companies with stable businesses and
businesses that we believe will continue to survive, cash flows that are currently available at very
and in some cases thrive, for the long term. attractive prices.
2022 market outlook 11 «Risk How AllianceBernstein builds an
inflation-resilient portfolio
The greatest risk is a more challenging inflation and
interest-rate environment, in which the only choices Uncertainty around inflation suggests maintaining
available to central banks are difficult ones. Policy balanced exposure
rates in the U.S., Europe, and China are likely to
remain on hold until at least the end of 2022. For now,
we believe that inflation is likely to fall back next year. J.P.Morgan Microsoft Roche
We continue to think that this pressure is transitory, VISA The Home Depot
but risks are heavily skewed to the upside. Upward
pressure on prices has already been less transitory
Inflation winners: Deflation winners:
than expected, perhaps hinting at a more fundamental
Banks Pharmceuticals,
shift in inflation dynamics. Focus on: Defence, Utilities
High quality
Equity market valuations remain at the high end of companies with
their historical range and are especially heightened in pricing power
certain industries. After this year’s rebound from the
pandemic-induced collapse, earnings growth is
forecast to fall back to more normal levels in 2022. The result is a macro-resilient portfolio of companies with
strong cash flows and resilient business models.
China’s property market, the U.S. debt ceiling, and
soaring energy prices in Europe all cloud the outlook.
We’re also concerned that supply-side dislocations Source: AB
stemming from COVID-19 could be more pervasive
Holdings are subject to change. References to specific securities are presented
and persistent than expected. Even after a recovery to to illustrate the application of our investment philosophy only and are not to be
the new normal, the global growth outlook faces many considered recommendations by AB. The specific securities identified and
risks that prevailed before the pandemic, including described herein do not represent all of the securities purchased, sold or
populism and elevated debt. Rising corporate taxes recommended for the portfolio, and it should not be assumed that investments
and heightened regulatory risk remain concerns. in the securities identified were or will be profitable. Logos, brands and other
trademarks in this presentation are the property of their respective trademark
Our strategy seeks to capture the upside in rising holders. They are used for illustrative purposes only and are not intended to
convey any endorsement or sponsorship by, or association or affiliation with, the
markets but also to mitigate downside risks. We do
trademark holders. Representative holdings from AB’s U.S. Strategic Core Equity
that by targeting holdings with a combination of strategy. As of September 30, 2021.
quality, stability, and attractive prices, what we refer to
as “QSP” stocks. As rates rise in today’s environment,
Return
QSP stocks should do well as stability appears cheap.
Our portfolio cushioned losses across diverse markets In this environment, we believe investors should
over the past decade, and we believe that it is well balance near-term optimism with medium-term
positioned to reduce risk if volatility strikes again. caution. Focusing on high-quality companies, with
relatively stable shares trading at attractive prices, is
a prudent strategy in our view.
Quality companies with strong balance sheets and
businesses with high cash flows should be well
positioned for an array of known and unknown risks.
Shares that have demonstrated stable trading patterns
should hold up better in bouts of volatility that may
strike along the road to recovery.
» 12 2022 market outlookRisk. Return. Impact. by asset class
In a market in which the most popular growth Impact
stocks look especially expensive, focusing on price is
also critical. We own quality compounders—quality stocks that can
consistently compound shareholder value—with
consistent growth drivers, rather than hypergrowth
themes with stretched valuations. Among stocks with
...the global growth outlook undervalued stability characteristics, we like
faces many risks that prevailed attractively priced companies with solid business
models. We prefer companies that earn higher return
before the pandemic, including on invested capital over rebounding companies with no
populism and elevated debt. earnings to show. Select supermarkets and utilities,
for example, are attractively valued in historical terms
and versus other stocks, with much higher free-cash-
Relative valuations of defensive sectors, such as flow yields compared to bonds too. Finally, we look for
health care, consumer staples, and utilities, are much companies that have been mispriced by the markets
lower versus their 10-year history than sectors such despite improving future prospects.
as information technology and consumer
discretionary. Within expensive sectors, investors can
also find select high-quality companies that trade at
attractive valuations.
Relative valuations of defensive sectors are attractive
Historical valuation percentiles (U.S. market, 10-yrs ending Sept. 30, 2021)*
Expensive 100
Non-defensives Defensives 85
62
55
46
13 14 14 14
1 2
Materials Energy Cons. Utilities Health Financials Comm. Real Industrials Cons. Technology
Cheap staples care services estate disc.
Past performance and historical analysis do not guarantee future results.
As of September 30, 2021. Source: I/BE/E/S, MSCI, Refinitiv, Russell Investments and AB.
*Valuation percentiles for sectors are based on cap-weighted average price-to next 12 months earnings forecasts relative to benchmark and relative to their own history.
Valuation percentiles calculated within Europe (including the U.K.), Japan, and the U.S. separately, subsequently averaged using MSCI World aggregate market capitalization
weights to arrive at the Developed Market numbers. The investable universe contains Russell 1000 stocks in the U.S. and the MSCI World index constituents from Europe
(including the U.K.) and Japan.
2022 market outlook 13 «Focusing on quality compounders and Global equity:
discounted stability
Baillie Gifford (growth)
Quality Discounted
compounders stability How do you see the investment landscape
changing in 2022?
Microsoft AutoZone Baillie Gifford’s key competitive advantage lies in our
ability to look beyond the next year and focus on the
The Home Depot American seismic changes that will play out over the next
Electric Power decade. We do so from the bottom up, focusing our
United
Healthcare Northrop research efforts on finding those companies that are
Grumman innovating to drive these changes. As such, we have
no strong view on the direction of the broader
investment landscape during 2022. However, there
are a number of themes present in our portfolio that
Holdings are subject to change. It should not be assumed that investments in any
specific security were or will be profitable. Exhibit does not represent all of the support our view of the world in 2032. Perhaps the
securities purchased, sold or recommended for client in the product. References most exciting themes on that timeframe lie within
to specific securities discussed are not to be considered recommendations by energy, software, and genomics (the science of
AllianceBernstein L.P. genomes/genetics)—a slightly different take on ESG
to most sustainable investors.
Brands and other trademarks in this exhibit are the property of their respective
trademark holders. They are used for illustrative purposes only, and are not intended
The energy transition away from carbon could be the
to convey any endorsement or sponsorship by, or association or affiliation with,
the trademark holders. most significant growth driver of the next decade.
Critical needs include more efficient methods of home
As of September 30, 2021. Source: MSCI and AB. heating and electricity-based road transportation,
and companies can make large contributions toward
In terms of sector allocation, we are overweight in
deployment at scale.
information technology, but more in the defensive side
of the sector, as well as in some consumer staples In software, we are enthused by a new cohort of
and utilities stocks. Highly profitable businesses with companies that are providing scale as a service,
resilient revenues tend to help mitigate risk in periods levelling the playing field between small companies
of volatility, unlike their nonearning counterparts. Such and large ones and lowering the barriers to entry for
a development is what we have observed in technology entrepreneurship. Amazon led the way with its cloud
stocks. We’re underweight in higher-risk parts of the computing offering, but we are seeing this play out
market, such as materials and industrials. in other industries such as communications (Twilio)
and ecommerce (Shopify). We expect this to drive up
We’re optimistic about the future for defensive stocks
levels of new business formation, to the benefit
and for our portfolio. Our goal is to maintain QSP—the
of society.
three core elements that underpin our philosophy—at
all times. In today’s environment, fundamental analysis A paradigm shift is coming in the health care world as
and deep knowledge across companies is essential to big data and artificial intelligence collide in what has
make dynamic, forward-looking assessments. The traditionally been an industry resistant to change. The
future isn’t going to look like the past, and investment advent of affordable gene sequencing precipitates an
analysis must be based on an insightful understanding era of highly personalized medicine, with treatments
of what’s really driving companies and industries in developed in a more efficient and focused manner.
order to plot a path back to normal. This looks set to lower costs for the health care
system while serving large unmet needs and improving
» 14 2022 market outlookRisk. Return. Impact. by asset class
patient outcomes. Particularly promising areas their revenues and earnings potential, our Chinese
include neurodegeneration (Denali Therapeutics) and holdings remain among the best growth opportunities
cancer diagnostics (Illumina’s Grail). available to us. In the short run, however, there has
clearly been an impact on share prices and,
Risk consequently, on the portfolio’s performance.
Events in China have been the focus for many investors Return
recently, as its government has intensified and
widened its regulatory crackdown on some privately The Global Stewardship portfolio is experiencing a
listed companies. Our current view remains largely in gradual evolution, driven mainly by a couple of main
line with our longer-term thinking. We believe there is themes. Firstly, there has been a gradual “changing of
a cyclical element to Chinese regulation. The Chinese the guard” with respect to technology stocks, with
state is now pushing back against private companies, what we believe are among the next generation of
seeking to reassert a greater level of control. technology winners. These include Meituan, Twilio,
and Affirm. Secondly, there is an increasing number
It seems reasonably clear that companies which had of holdings in areas where change was underway
been perceived to be ignoring the warnings of pre-COVID but has been accelerated during or because
regulators (Ant and Didi for example) have been of the pandemic; Zoom, Upwork, and Samsung SDI
punished as a result. This is to be expected, and we are all good examples.
want our holdings to work with the authorities over
time in order to succeed as businesses in the context With Affirm, for example, it is our contention that the
of the needs of the broader Chinese society. In company is positively aligned with both merchants
addition, as we have previously noted we believe that and consumers in its mission to offer simple, honest,
greater oversight of, and restrictions on, fast-moving and transparent financial products. Such services
technology firms should be anticipated, both in China are available via online merchants that today include
and abroad. Moreover, this is, on balance, a positive Amazon, Peloton, and those on the Shopify platform.
development. For example, regulation of the Chinese We believe innovation is good for the long term of the
ecommerce sector is focussed on creating a level financial services industry, and are keen to support
playing field for consumers, merchants, and employees. those businesses with the potential to lower frictional
As responsible investors it is hard to argue against costs for stakeholders. The company’s most recent
such ambitions. results very clearly highlight the success the
company is having in appealing to a greater array of
merchants and consumers, while slowly expanding
its offering beyond its core lending product. For
The energy transition away example, Affirm has attracted US$300M of deposits
from carbon could be the most in its savings products this year with absolutely no
promotional spending.
significant growth driver of
When considering Zoom Video Communications, in
the next decade. the last 18 months we’ve seen video conferencing
move from a “nice to have” to a “must have” for most
We could go on discussing this complex area but in organizations. As we shift from home working to
the interest of brevity we should attempt to answer hybrid arrangements, this desire for hyper connectivity
perhaps the key question for investors: will increased is likely to endure, if not increase further. Despite it
government intervention lead to a sustained valuation being a difficult period for Zoom in performance terms
discount on Chinese stocks? In the long run, we as we emerge from strict COVID-19 restrictions, the
believe the answer is no: as outlined above this is just Global Stewardship team remains enthused by its
a cyclical reassertion of authority. When judged on long-term view, with the launch of new Zoom features
2022 market outlook 15 «like built-in apps and a digital event offering, as well Codexis develops custom enzymes. It works with
as traction in Zoom Phone. The latter is a unified app health care companies to help improve the drug
for phone, video, meetings, and chat. It allows the manufacturing process, providing the active ingredients
user to seamlessly make and receive phone calls, for many drugs produced by GSK, Merck, and
share content, participate in video meetings, and send Novartis. In each case the enzyme is “designed in,”
chat messages from Zoom desktop and mobile apps, with Codexis receiving a payment at each stage of
functionalities that are proving popular among regulatory approval and, ultimately, ongoing royalties
customers in the hybrid working transition. All these if commercialization is achieved.
developments suggest Zoom is closer to the start
than the end of its growth opportunity.
Global equity:
Impact Federated Hermes (core)
With engagement at the heart of our process, we
How do you see the investment landscape
learn a lot from the exceptional founders and
management teams of our portfolio companies, changing in 2022?
improving our understanding of these industries, and Global equity markets have continued to break new
the nature of technology-driven disruption. This is a ground this year, but the bull market that started in
two-way process, and so we expect these interactions 2009 is showing signs of fatigue. Equity valuations are
to be our greatest opportunity for impact above and at peak levels with measures such as the GDP to
beyond simply owning impactful businesses. The market capitalization ratio at an all-time high, and
potential for a few innovative companies to drive although earnings growth remains strong, momentum
progress as well as stock market returns has perhaps has started to slow.
never been greater. As investors we are in the
privileged position to contribute meaningfully to Part of the reason for this is technical, with
solving society’s greatest challenges and we believe comparable earnings set to get more difficult from
over the long term this approach will also deliver here. Inflation and supply constraints are also playing
sustainable and superior returns for our clients. their part, although the latter is likely to mean that
growth is being delayed rather than declining, which
At a stock level, perhaps the impact potential is is reflected in robust earnings growth estimates for
highest in health care, in which we believe we are on 2022. We have already started to see how much
the cusp of great transformation. Global Stewardship importance investors are placing on quarterly earnings
has exposure to innovative treatments, via holdings and guidance statements, and we expect that this will
such as those mentioned previously. More recently we continue in 2022. This favours companies exposed to
have been buying some of the companies that underpin structural trends, such as the transition toward a
these firms as the “picks and shovels” of the health more sustainable economy, which has accelerated
care world. Illumina (gene sequencing machines) has during the pandemic and shows no signs of abating.
been a holding in Global Stewardship since the
strategy’s inception, and it has been joined over the However, the debate around whether inflation is
past six months by 10x Genomics and Codexis. transitory or not will continue to rage, at least for the
first half of 2022. As such, the sensitivity of markets
10x Genomics pioneered the field of single cell towards inflationary expectations and interest rates
sequencing, in which biology can be interrogated at a is also likely to remain high, which could lead to some
much greater level of granularity than before. For significant, short-term factor and sentiment swings
applications such as oncology, where no two cancers and keep volatility at an elevated level. Our belief is
are alike, diagnostic tools that allow for more detailed that inflation will be transitory, which is consistent
analyses are a welcome addition to the arsenal of with what the bond markets (and central bankers)
medical researchers. are telling us.
» 16 2022 market outlookRisk. Return. Impact. by asset class
This expected volatility is somewhat welcome as it material weaknesses. This approach has been
provides opportunities for active investors with diverse successful over many years and tangible evidence of
portfolios to generate alpha by taking advantage of this can be found in the way our portfolios have
short-term price swings to build exposure to performed since the pandemic started. With
sustainable companies with structural advantages uncertainty remaining high, we continue to believe
that should grow regardless of the market that remaining disciplined and diversified be vital
environment. next year and beyond.
Risk
Inflation expectations are likely to the remain a key Global equity markets have
influence on markets as we head into 2022. Currently, continued to break new ground
inflation expectations are elevated, especially in the
U.S., but with inflation-hedged bonds still showing this year, but the bull market
negative real yields, the bond market is indicating that that started in 2009 is showing
it is transitory and suggests that interest rate rises
are likely to be modest. Any change to the belief that signs of fatigue.
inflation is transitory could result in interest rates
rising faster than expected, creating a real risk for the
global economy and global equity markets. Return
Meanwhile, earnings are likely to decelerate from here We are starting to emerge from a crisis, which has in
as comparable figures from last year start to become many ways changed how people behave and what is
more difficult to beat. Currently, expectations remain most important to them. The surge in working from
high, with supply chain issues delaying rather than home has undoubtedly raised the importance of having
reducing demand. With higher expectations comes a a better work-life balance. This has tempted some to
higher risk of disappointment, and investors are leave their city apartments and head for more space in
already paying particularly closer attention to company the country or the suburbs for a better quality of life. It
earnings and guidance statements. With markets has, alongside the pandemic, also severely disrupted
close to all-time highs, there is considerable downside consumption of services such as entertainment and
risk for companies that fail to meet expectations, restaurants, which has been usurped by spending on
especially those with a high valuation multiple. things like household goods or renovations, a
development that looks set to continue.
One other consideration is with respect to ESG. In
2021, we saw some of the more popular sustainable Automation is likely to be another beneficiary of the
investments become detached from their underlying economic transition. We have already seen an
fundamentals as inflows into so-called “ESG assets” acceleration of this trend, but we expect it to continue
driven by a herd mentality chased a common core of due to the increasing scarcity of labour in lower-paying
opportunities. ESG characteristics should be a jobs. As countries such as the U.K. transition towards
consideration for all investment decisions, rather having a higher skilled, higher paid workforce, the
than be thought of as a narrow set of opportunities. demand for automation should grow. This will not
This is our approach, and we continue to find a diverse happen overnight, however, but it provides a nice
range of companies with good or improving ESG structural advantage for companies that provide
characteristics that are less obvious but that are these solutions.
contributing to the sustainable transition.
The transition to a more sustainable economy also
One of the foundations of our investment approach continues to represent an exceptional investment
is to identify a diverse range of companies that look opportunity. Embracing sustainability is not just about
attractive from multiple perspectives and have no avoiding risks, it is also about finding opportunities.
2022 market outlook 17 «Companies that play an active role in adapting to and experience, and that also represent their stakeholders.
mitigating some of the greatest environmental and We also want companies to have a clear strategy, a
social challenges that we see today are likely to be sustainable business model and robust risk
doubly rewarded, enjoying robust growth in demand management processes. Transparency is critical in
while further benefiting from future policy and this regard, so improving disclosures is key in our
legislative action to promote sustainable development. holding companies to account.
Impact
Global equity:
Engagement is a key part of our process, and we Impax Asset Management
will continue to speak to companies on a range of
ESG issues. Being an active owner is vital in holding (thematic)
companies to account, not only in ensuring the
adequate management of the ESG risks they face, How do you see the investment landscape
but also in encouraging firms to change for the better. changing in 2022?
We believe improvements can unlock significant
shareholder value over the long term. Effective Throughout these challenging times, Impax has been
stewardship is one of the principal activities that encouraged that public policymakers and businesses
enable us to deliver this for our clients. have continued to pay attention to the sustainability
themes that underpin our investment thesis. As we look
Our engagement is therefore focused on ensuring ahead, we believe the outcomes of the COP26 climate
companies are responsibly governed and well talks and the policies of the Biden Administration are
managed to deliver sustainable long-term value likely to accelerate the transition to a more
while improving the lives of employees, promoting sustainable economy. For example, the recently
diversity, and supporting communities. Indeed, our passed U.S. infrastructure bill is supportive of the
engagement plans cover a range of societal and sectors in which Impax invests. A constructive capital-
environmental issues in which we believe we can expenditure environment is good for our strategy
make a positive impact. overall, and the renewed focus on sustainability and
green infrastructure in the U.S. should provide
From an environmental viewpoint, this includes multi-year demand for the companies in our portfolio.
ensuring companies have credible strategies to reduce
emissions to be aligned with 1.5-degree targets,
Risk
building a circular economy to achieve sustainable
levels of consumption, protecting biodiversity, and Companies not delivering on growth expectations
controlling pollution of air, land, and water to below (because supply chains take longer to normalize, or
harmful levels. for other reasons), in combination with rising yields
leading to declining allocations or reallocations out of
On a social level, our focus is on human rights linked
equities, are the largest current bigger-picture risks
to company operations, products, and supply chains,
to the portfolio.
plus the provision of affordable essential goods and
improving human capital management and labour Valuations in the market are generally priced for
rights to help achieve a healthy, skilled, and productive optimal conditions and can be challenging, particularly
workforce. We are also encouraging companies to when framed against a macroeconomic backdrop of
develop strong corporate cultures that help build a inflation, higher raw materials prices, decelerating
more equal society. growth, and persistent supply chain bottlenecks.
To do this, we seek strong governance and Additionally, during sharp sector or style rotations,
management of the most material risks. This requires the inherently more cyclical nature of the thematic
effective boards that have the required skill and universe can be a detractor—however, for this reason
» 18 2022 market outlookYou can also read
