Japanese equities
Nicholas Price, Portfolio Manager of Fidelity Japan Trust, said: “We remain broadly positive on the outlook for the Japanese market as we move into 2022. Valuations remain supportive and compare favourably with those in other developed markets such as the US, while earnings momentum is strong.
“A delayed recovery in the manufacturing sector due to COVID-19 restrictions and supply disruptions means that some of the earnings recovery has been pushed into the first half of 2022. While there was some weakness in the first half of fiscal 2021, we expect corporate profits to be quite strong in the first six months or so of next year. The outlook for the second half of 2022 is less clear with the potential for interest rate rises. A potential negative would be high and rising energy prices leading to an economic slowdown globally.”
Asian equities
Nitin Bajaj, Portfolio Manager of Fidelity Asian Values, said: “In Asia, small-caps have materially outperformed large-caps in the last 12 months and since the beginning of 2020. This looks like a partial mean reversion from what happened between 2016 and 2020 when large-cap stocks significantly outperformed small cap stocks, especially small-cap value stocks.
“Over the last few years, the valuation differential between large growth stocks and small value stocks had reached an extreme last seen in tech bubble of 1999/2000. Hence, there was an expectation that investors would rotate out of growth stocks and into value names in the hope that value would benefit from an economic recovery.
“This has played out in the Asian large-cap space so far in 2021, but not to the extent we expected in the Asian small-cap segment. Valuations remain very bifurcated and many small-cap value stocks continue to trade at significant discounts relative to large and small growth companies. Our sense is that we may have quite a way to go on this journey as historically small-cap value stocks, in aggregate, have had a good track record of growing earnings faster than small-cap growth stocks.”
Canadian equities
Dean Orrico, Manager of Middlefield Canadian Income Trust, said: “Canadian equities have outperformed most developed markets in 2021 and we expect the country’s economic recovery to continue well into 2022. Earnings growth is gaining momentum in a number of sectors including real estate, financials and energy. In addition, the extreme asset price dislocations observed during the pandemic still have room to moderate with valuations for Canadian market sectors significantly lagging their US counterparts. Growing concerns about the persistence of inflation could support higher North American interest rates as central banks begin quantitative tapering programs and interest rate hikes.”
Emerging markets equities
Ross Teverson, Manager of Jupiter Emerging & Frontier Income Trust, said: “In a world where valuations for some asset classes look very high relative to history, the opposite holds true for many companies and sectors within emerging and frontier markets, despite the potential for strong long-term growth.
“While many smaller emerging and frontier markets remain a long way behind developed markets and China in terms of their vaccine programs, we saw a marked acceleration in vaccinations during the second half of 2021, which bodes well for a continued recovery in economic activity in 2022. As investors continue to look past the impact of the pandemic, we expect that the scope for operational recovery and potential for a rerating from current valuations will be positive drivers of equity returns.”
Matthias Siller, Co-Manager of Barings Emerging EMEA Opportunities, said: “In the short term, we expect global markets to remain volatile as investors closely monitor progress on containing COVID-19 outbreaks across many countries. There are also existing challenges centred on inflationary pressures and monetary policy tightening.
“Despite short-term headwinds, there are reasons to be optimistic for what we call Emerging EMEA, the developing markets across Eastern Europe, the Middle East and Africa. We have continued to see a recovery in earnings growth, underpinned by the strength of the consumer. High disposable income growth across most parts of the region, combined with ongoing efficiency gains, will continue to drive earnings over the medium term. This seemingly disparate region also possesses a degree of resilience against inflationary pressures, as rising energy prices have helped support economic activity and stock market performance across some of its markets.”
Andrew Ness, Co-Portfolio Manager of Templeton Emerging Markets Investment Trust, said: “Looking towards 2022, we believe emerging markets offer a compelling investment opportunity. The macro and fundamental backdrop is supportive, with debt levels much lower and equity valuations cheap versus developed markets. In addition, emerging markets companies have been generating more free cash flows versus developed markets, which could potentially contribute to an upward re-rating. For these reasons we remain bullish on emerging markets in the longer term, even as we are mindful of some near-term risks such as the recent Chinese regulatory crackdown and further virus outbreaks.”
Nick Price, Portfolio Manager of Fidelity Emerging Markets, said: “2022 could prove to be a challenging year as property and construction-related activities slow. However, sentiment has been very weak with a lot of bad news already reflected in prices. China’s economy appears robust – exports have benefitted as consumers spend on goods, not experiences and travel, and there are some encouraging early signs that China may be bottoming out.
“More broadly, we see potential for negative surprises emerging from a less certain political backdrop. In Brazil, for example, a convoluted political scenario adds to the uncertainty around the economic recovery – a risk we are unlikely to embrace.”
