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.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2021 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.