Manager comments on the outlook for 2022 and beyond
Gervais Williams, Co-Manager of The Diverse Income Trust, said: “In 2022, we believe the current slowdown in the Chinese economy will prove to be structural in nature. Just as happened in Japan in 1989, China’s giant debt burden, combined with its aging demographics, will lead to an abrupt cessation of its growth trajectory, in our opinion. Alongside, long-dated bond yields – which are now close to zero – may start to reverse the favourable valuation trend of recent decades.
“Companies with negative cashflow that are reliant on the stock market for funding, or those that are over-levered, could be particularly vulnerable. Meanwhile, companies that generate cash surpluses each year could acquire over-levered, but otherwise viable, businesses from the receiver. So, even if things get worse, sometimes their ability to generate plentiful cash might actually improve.
“The US is a stock market dominated by high-beta stocks, and the equity-income dominated UK stock market is a low-beta one. As the challenges above become more apparent, we anticipate that a long period of high-beta underperformance and low-beta outperformance could arise. Over the next couple of decades, the UK could outperform substantially.”
Lee Qian, Manager of Keystone Positive Change Investment Trust, said: “We don’t make any attempts to predict the direction of bond yields or markets. Rather, we try to understand what the next waves of innovation might be and what implications they might have for society and our planet over the next 5, 10 or 25 years. It feels as if we are on the cusp of several waves of innovation and transformation, including the energy transition, electrification, a material revolution, genetics, AI and quantum computing. Each of these waves in isolation are exciting; in combination, they could be incredibly powerful.
“Our focus is on identifying the wave makers – the companies driving change and disrupting the status quo – and to play our role in helping the development and scaling of innovative solutions to global challenges by providing long-term and supportive capital, something which has sadly become increasingly scarce over the years. By doing so, we step up to our responsibility in steering towards a more sustainable and inclusive future and can identify exceptional businesses that will deliver attractive returns for shareholders.”
Andrew Bell, Manager of Witan Investment Trust, said: “Assuming that (despite the new Omicron variant) the world is close to being able to live with COVID, 2022 should see a sustained period of reopening, economic recovery and gradual resolution of the supply chain frictions caused by politics and the pandemic. Equities where earnings exceed expectations should have a good year.
“Inflation is likely to recede from an early 2022 peak but may well settle at higher levels than pre-pandemic. This is partly due to supply chains being redesigned to prioritise ‘just in case’ rather than ‘just in time’, partly because the ‘build back better’ mantra now seeks faster growth, even at the expense of somewhat higher inflation and, importantly, because the up-front investment required to combat climate change for the benefit of future generations needs to be sold to the current electorate. This will require maintaining a positive growth backdrop and funding it with long-term borrowing rather than tax rises.
“For contrarians, the UK and emerging markets appear widely disliked and lowly valued. For the longer term, I would bet on the US growing faster than other developed economies, but its stock market reflects more good news than others and could be a wallflower in 2022. I expect commodities, renewable energy and healthcare to do well.”
Inflation and interest rates
William Meadon, Manager of JPMorgan Claverhouse Investment Trust, said: “For 2022, one of the risks we are monitoring closely is the path of inflation. Against this backdrop, income investors should look at companies with strong pricing power to protect their portfolio from inflation risks.
“It is unclear whether the market overall will show dividend growth in 2022. In this environment, the advantage of investing in investment trusts which can draw on reserves to maintain dividend payments, is clear.”
Nick Brind, Co-Manager of Polar Capital Global Financials Trust, said: “Central banks globally have started raising interest rates at the fastest rate since before the global financial crisis. Against this backdrop, financials, particularly bank shares, have been outperforming as they are one of the biggest beneficiaries of rising interest rates.
“With inflation hitting levels not seen in ten or more years we would anticipate interest rate expectations continuing to rise, which if correct should result in the sector continuing to outperform. This could be underpinned by the increased capital return as banks accelerate the return of excess capital built up during 2020.”
