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Big portfolio decisions ahead of 2022


With 2021 nearly done and dusted, it’s time to reflect on ‘what was’ and perhaps reposition your portfolio for ‘what could be’. Looking back at the year, always helps paint a picture of what lies ahead.

There’s a lot to celebrate both good and bad.

The pandemic is largely behind us with multiple vaccines administered across the world but at a great cost and a massive debt bill that may take many years to pay off. While the last two years have been an easy ride for investors, next year will be a lot more testing. A year in which the imbalances brought on by the pandemic, begin to unwind and resolve.

  • Many are calling 2022, the year of normalisation. If there even is such a thing.

    According to Randal Jenneke of T.Rowe Price, 2022 will is the year of transition, from tailwinds to headwinds. The Head of Australian Equities isn’t too positive about the year ahead saying, “global investors face a more uncertain outlook as central banks begin to withdraw liquidity and extraordinary fiscal stimulus turns into extraordinary fiscal drag.”

    The stimulus withdrawal will in effect act like tearing off a band-aid, creating a few headwinds for global growth next year. And clearly that matters. The opposite of fiscal stimulus is fiscal drag in 2022, a clear negative for company earnings. With most companies trading on astronomical PE’s, it’s also a negative for share prices.

    Contrary to this view; Paul O’Connor, Head of Janus Henderson’s UK-based Multi-Asset team, is a little more optimistic of the year ahead saying, “while conditions look good for another year of solid growth, investors should expect surprises and occasional market setbacks.” There may be a long list of uncertainties clouding the outlook for 2022, but overall, O’Connor says 2022, “does look set to be another year of solid global growth, driven by the ongoing reopening boom in the major developed economies. Much greater uncertainty surrounds the outlook for inflation and its impact on monetary policy.”

    And so that brings us onto the inflation problem, which appears to have been brought on by supply chain bottlenecks, i.e. semiconductors. O’Connor is confident “these tensions should ease in the first half of the year, assuming no significant new economic restrictions are imposed in key producing countries. While goods prices have been the main drivers of inflation during the pandemic so far, service sector inflation could be the big story for 2022, as leisure, travel and other labor-intensive service sectors see a surge in pent-up demand in many major economies.”

    The knock-on effect from massive stimulus saw a corporate earnings bounce driven by strong household spending on goods rather than services. And that caused supply chain bottlenecks such as the semiconductor shortage. The end result, a rise in inflation. Usually, central banks would raise interest rates to combat rising inflation, not this time. BlackRock Research sees this as a short-term demand related surprise.  Yields will go higher. Rises in goods inflation tend to be transitory however inflationary pressures in labor and service sectors are more likely to be persistent.

    Evergreen Consultants Founder and Chief Executive, Angela Ashton, isn’t so concerned that inflation will cause too many headwinds. She says: “While higher inflation has traditionally provided a case to lift equity risk premia, we have decided to retain our estimate for the Australian equity long-term ERP as we believe that the impact of financial repression, where nominal rates are kept relatively low, will see investors continue to favor equities.”

    At the top of the list with the highest returns possible, Evergreen consultants forecast emerging markets to return 9.05% albeit with the highest volatility of 17.5%. Australian small companies are projected to return around 8.65% per year with similar volatility of around 17%. Following on is global equities at 8.05% and Australian equities with 7.75% with lower volatility of around 14% and 13.5% respectively.

    The journey for the world to decarbonize and reach net-zero emissions is also well underway. BlackRock research says, “the transition to a more sustainable world is happening now, not at some distant point in the future. First, surging fossil fuel prices in 2021 have exposed a lopsided transition toward low-carbon power. We still see an orderly transition in the medium term – but with bumps on the way leading to growth and inflation volatility.”

    Carbon-heavy companies are acting now and not waiting for policy changes. By acting now it’s opening up new markets and investment opportunities such as lithium, rare earths and renewable energy.

    In summary, BlackRock are risk-on with a preference to Chinese stocks which are cheap. T.Rowe Price on the other hand are “less keen on cyclical stocks that outperformed in 2021.” They see the market environment in 2022 as being suited to quality defensive companies.

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