As this is our final newsletter for 2021, I’d like to take the opportunity the wish you all a relaxing festive season and all the best for 2022. On behalf of the Lonsec, I would like to thank you for your support and for entrusting us with your clients’ investments and we look forward to working with you in the coming year.
Rather than recapping on 2021, I thought it would be of value to look to the future and provide you with a sense of the top three investment themes to consider for 2022.
1. Increased opportunity for bottom-up active investments
We are observing the rise in dispersion in returns within asset classes across individual securities and sectors. We expect this dynamic to continue as market conditions evolve. For the best part of the last 10 years markets have been driven by unconventional central bank monetary policy strategies, primarily quantitative easing, which have distorted markets. This policy action has resulted in an incredible rise in the value of risk assets and for most clients it has resulted in a significant rise in their asset values.
This environment has resulted in certain investment styles and sectors dominating market returns. An example of this has been the incredible ascent of growth stocks within the technology sector.
We think that we are heading into an environment where investors will need to be more selective in security and sector allocations and that the “easy money” related to simply investing in high beta parts of the market has been made. This does not necessarily mean that value stocks will now take the mantle in terms of driving returns. It just means that investors will need to be more active in their security selection, irrespective of style.
2. Inflation to dominate the market narrative
Central bank policy settings will be a critical consideration for portfolios in 2022. It is safe to say that most of us agree that interest rates will go up at some point from their record lows. The question is by how much and when. The market has been trying to price this in which has been evident in the movements we have observed in bond yields. From a domestic perspective, our view is that the RBA will be in no rush to raise rates as wage growth has remained sanguine compared to the US, where we have seen core inflation go up and an upward pressure on wages.
Central banks have also flagged a desire to reduce monetary support via quantitative easing strategies commonly referred to as tapering. Moderate inflation can be positive for equities, but spiraling inflation will be negative for most asset classes.
From a portfolio perspective, we think it is too early to position the portfolios for a single scenario. While there are real inflationary pressures present, there is no doubt that there is a transitory component to the current inflationary environment driven by Covid and the impact it has had on supply chains. We think it is prudent to have some exposure to assets that may benefit from inflation, such as real assets and gold, and we also recognise that the situation is fluid. Portfolio diversification remains your best defense.
3. X Factors to cause market gyrations
The last two years have taught us that life can change very quickly and that some things are simply out of our control. We continue to be in a global pandemic and the situation is dynamic. The prospect of new Covid variants is real, and we need to acknowledge that we are likely to experience bouts of market volatility depending on the direction the pandemic takes.
Furthermore, geopolitical risks are ever present and the most recent heightening of tensions between China and the US reminds us of this.
From a portfolio perspective it is important not to be reactive to ‘x factor’ events and to consider whether these scenarios have any long-term structural impact on markets, aside from the short-term market volatility they may cause. This is why having a clear investment philosophy is critical, as it allows you to navigate such events in a structured and considered way.
As always, the market will no doubt bring surprises as we navigate 2022. I look forward to continuing the discussion.
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