By Nigel Bolton, Co-Chief Investment Officer of BlackRock Fundamental Equities
Consumer-powered economic growth and negative real interest rates will help deliver positive gains for equities in 2022, yet the journey for stocks may be more volatile in 2022, as inflation concerns gain traction.
The COVID-19 crisis has jolted the world from persistent deflation to persistent inflation, in our view. Demand for goods is surging, and supply is struggling to keep up. We believe interest rates may rise only gradually now that global government debt has soared to more than 100% of global gross domestic product. This means we could see negative real interest rates and bond yields in developed markets for several years — or even decades. Investors may switch into equities for growth and income to help protect their savings from inflation.
Stocks, not sectors
Equities have an edge over other asset classes in such an environment. Yet we don’t think it’s simply a case of allocating to cyclical sectors. We expect to see winners and losers within themes and sectors.
COVID-19 has accelerated trends that are disrupting traditional industries. For example, energy companies have to wrestle with the costs of the carbon transition. Banks face competition from digital rivals and the ability of central banks to raise rates is limited by the level of outstanding government debt.
Other cyclical sectors are being disrupted by technology, as can be seen with the auto sector and electric vehicle start-ups.
Selectivity matters more
To find those companies that can continue to beat earnings expectations even as their costs rise, here are some characteristics we look for:
- The ability to pass costs on to customers is crucial if companies are to maintain profit margins.
- Pricing power often comes with a strong brand.
- Some European luxury and beauty names should continue to prosper, especially those that invested in e-commerce.
- Companies that have embraced digitalisation to lower the levels of assets they own can mitigate the impact of supply disruption.
- We focus on companies with unique intellectual property and strong market share. Some of the big tech and software companies remain compelling amid accelerating digitalisation across sectors, and as part-time work-from-home becomes the norm.
- We are going to see heavy capital expenditure in the U.S. and Europe as governments pass infrastructure spending bills. There is an emphasis on “green” spending, so we look for those companies — such as insulation providers and heat pump manufacturers — that can play a part in reducing carbon emissions.
- We also like companies linked to the surging demand for EVs such as semiconductor makers and some of the EV start-ups themselves.
- Tackling food emissions with innovation is a big investment theme and we are exploring companies that can reduce greenhouse gas emissions in the food sector, a critical part of the transition to a green economy.