Welcome to the December Manager Panel! Each month, where relevant, InvestNow will ask some of our fund managers some questions about a topic. Read below some of our fund managers investment outlooks for 2022.

Q1: What do you think are the top three things that will have the greatest influence on performance/returns in 2022?

Inflation and the outlook for interest rates will be the key driver of returns over the next 12 months. Global economic growth is improving as the negative impact of government measures taken to slow the spread of COVID are erased. However, consumer price inflation has risen rapidly with the supply of goods constrained. This is having a negative impact on consumer confidence. While central banks seem comfortable that the pace of economic growth and inflation will moderate and see current inflation as mostly transitory, there is a risk that inflation expectations could continue to rise for time and we are starting to see signs that this is having an impact on wage setting behaviour. What was perceived to be transitory inflation could become a more entrenched and lead to central banks tightening monetary policy by more than investors currently expect. This would have negative impact on bonds as well as equities with the valuation of large cap growth stocks still at elevated levels.

Q2: What do you see as being the biggest investment trends in 2022?

Setting aside the contrary opinion outlined in the previous question, the emergence of the retail investors in markets and the buy the dip mentality that has persisted this year is quite possibly here to stay for some time. Central banks remain in a “do whatever it takes” mode to ensure their mandate for growth has been met. Furthermore, central banks are willing to allow inflation to remain at the higher end of their target range for a time to ensure that disinflation does not re-emerge. With this backstop in place and while self-fulfilling support remains in the form of retail investor demand then it is likely that we will continue to see positive momentum in large cap growth stocks. We are yet to see extreme levels of investor over-enthusiasm that would typically warrant extreme caution in regard to this trend.

Q3: Are there any specific markets/sectors of interest to you in 2022?

As a contrarian investor I see risks in large cap growth, with value and small cap stocks representing better relative value. As outlined in the previous question it is likely that the momentum in these growth names will persist next year and their sources of revenue are increasingly diversified are still attractive in my view. However, I would be inclined to direct new flow toward less popular names that will benefit from a post COVID world. Some of those companies that have struggled with COVID restrictions and in a relative sense against leading online retailers and those companies that have had adoption rates brought forward by WFH trends.

Q1: What do you think are the top three things that will have the greatest influence on performance/returns in 2022?

The path of interest rates have to top this list. More specifically, how central banks respond to persistently high inflation going forward. We have seen unprecedented global monetary stimulus in the past 2 years which has boosted valuations of many asset classes, including shares, bonds and property. If central banks get serious about tightening policy then this will be a big headwind for those assets.

Secondly, as much as we wish the Covid pandemic was in the rearview mirror, ongoing waves of new variants are likely to complicate the picture for policy, economic growth and profits going forward. This will continue to drive large swings in the types of stocks that perform as these waves rise and then subside. Overall though, future Covid waves are likely to have a diminishing impact on investment decisions through time.

Finally, the past two years have marked the return of the retail investor. Globally, household savings have been channelled into sharemarkets, driving performance and creating some very high-flying companies. Next year we will see whether this wave of investment continues, driving asset valuations even higher. If the demand for shares abates however, we could see some parts of the stock market in particular experience a sharp correction.

Q2: What do you see as being the biggest investment trends in 2022?

The last couple of decades has seen the rise of low cost ‘passive’ index investing. This has coincided with a period of strong index returns that passive funds have captured very efficiently. As we look ahead, the outlook for different companies and sectors varies significantly depending on how sensitive a company’s earnings might be to factors such as inflation. In addition, there is significant divergence in valuations of different regions and types of companies, with growth stocks in particular enjoying some very high valuations. Headline index returns are likely to be lower than the past few years but we are likely to see a continuation of the significant rotations under the surface of the stock market. This means going forward, active managers are presented with a bigger opportunity to select the right stocks and deliver a better risk and return outcome vs passive index funds.

The other trend that will continue to feature heavily is ESG investing. Fund managers (rightly so) are increasingly being held to account to ensure that funds are being invested responsibly. Going forward, this important but complex element of investing will be met with increasingly sophisticated approaches from managers.

Q3: Are there any specific markets/sectors of interest to you in 2022?

2022 is likely to be a year of lower market returns, punctuated by increasing volatility. With bond markets already pricing interest rate hikes in many countries (but most notably New Zealand), there are now some assets that offer a reasonable rate of return from dividends or interest income even if these assets don’t increase in price.

High dividend paying shares in New Zealand and further afield, alongside some parts of the corporate bond market offer yields of between 4 and 6%. Although modest, these returns and the lower level of volatility that these assets experience (compared to growth shares for example) mean they can play a key role in anchoring portfolios.

Beyond that, diversification across assets and within assets (for example different types of company shares) as well as an ability to be nimble will stand investors in good stead to weather whatever 2022 brings.