Richard Scope, manager of the VT Tyndall Global Select Fund at Tyndall Investment Management, the independent boutique asset management house, offers his outlook for 2022.
“The euphoria and relief that permeated through global economies as countries reopened in 2021 came up against mounting inflation, central bank tightening and further mutations of the COVID virus, resulting in wild swings in investor sentiment and stock leadership. Many of these themes still exist as we enter 2022. However, as the world learns to live with COVID, investors have reasons to become more optimistic about corporate profitability and market returns over the coming year.
“The sharp rise in inflation seen in the back half of 2021 has led to analyst estimates for 2022 being lowered. However, this sets an easier bar for companies to hurdle and exceed. Most companies are in the process of, or are already, passing through the inflation headwinds through price increases to the end consumer. Although it is not yet over, there are initial signs that the world is starting to overcome the supply chain disruptions, suggesting that we may well have passed the point of peak inflation. Lumber prices, freight rates and even port congestion are down from their previously elevated levels.
“Just as many companies faced a lag between price increases being implemented to offset increase input costs, it is likely that a similar effect will also occur as inflation subsides. Most companies are understandably more willing to raise prices to offset costs on the way up, but less willing to reduce them on the other side of the mountain, and we see no reason why 2022 will be significantly different.
“Most notably in the latest reporting season was the number of management teams commenting that record demand was accentuating supply constraints, preventing them from satisfying customer orders. Given that inventories are close to record lows, most, if not all, of these orders will have been postponed until supply can catch up rather than being cancelled, so revenues and company visibility are likely to be better than the year passed.
“Those companies that are able to master Porter’s five forces should be able to convert these revenues into higher margins and cash flows, thus enabling them to continue to invest in future growth and boost shareholder returns. However, to do so also requires astute management teams. Just as in 2021, we expect that 2022 will not be a steady path, and swings in investor sentiment will force changes in leadership, suggesting that investors would be prudent to position their portfolios with a mix of re-opening pandemic winners, reflation beneficiaries and traditional growth companies blended with those that continue to benefit from the digital transformation that the world is undergoing. The VT Tyndall Global Select Fund continues to have an emphasis on long-term quality, within which all of these themes are represented, and we believe that profitability of our underlying holdings will continue to increase in the forthcoming year. Bonne chance!”
