Nov 24, 2021
2021 has actually been a reasonable year for equities and I think what it probably reflects, if there is one single most important driver, the continued support of liquidity both from the US Federal Reserve and the European Central Bank. I think their actions have definitely smoothed over some of the cracks which have appeared in terms of the economic landscape.
I think it is important to reflect the fact that we are living in a world which has got inconsistent COVID responses, with different actions taken by different countries around the world. I think some of those COVID responses have morphed into political responses, which is causing some increased nationalism across the board and I think that is also introducing significant distortions, particularly in the goods markets. I certainly think that bifurcation and some of those crosscurrents are incredibly important. We are not worried about 2022 but we recognise that in this environment there are definitely winners and losers and it is not a normal cycle by any stretch of the imagination.
I think the biggest risk for equities is going to be a disorderly withdrawal of liquidity from equity markets. Liquidity support has definitely driven equity prices to the elevated levels where they are at and we also know that bond yields are probably naturally low. So, US 10-year rates sitting at well below 2%, in an environment where inflation is printing at 5%, is an inconsistency. Most people wouldn’t think that negative real interest rates is a central scenario and yet that is what we have been living with for more than 12 months now. I think the resolution of where inflation will settle at is critical to understanding the outlook for 2022.
I think it is very important that investors are mindful of some of the interest rate risks. I think it is also important for investors who own technological stocks to own the technology stocks with pricing power. It is not particularly helpful to own deflationary hardware businesses or businesses that are struggling to push price increases on.
Pricing power in technology is important because that will offset an investor’s interest rate risk. Thinking about consumer companies, inflation at the till is definitely higher and some of the food producers are benefiting from that. So, we would think that consumer companies provide investors with both defence in the event that there is a setback, and also some inflation proofing within their portfolio, which is absolutely critical heading into 2022.
With Western central-bank policy normalising, economic growth rates diverging and global trade still readjusting to life after lockdown, investors have a complex environment to navigate in 2022.
Ninety One’s portfolio managers assess the outlook across their asset classes and regions.
Our team also takes a deep dive into the outlook for emerging markets, as well as into how sustainability will drive investment outcomes next year and beyond.