Simon Brazier, Co-Head of Quality and Portfolio Manager, UK Alpha Fund:
Margins are set to come under pressure in 2022, but the key is to pick those businesses still able to grow their profits.
How would you summarise the current environment?
It is one of huge uncertainty, despite the vaccination programme in place and some form of resolution around Brexit. However, I think the biggest uncertainty comes from the future for inflation and, therefore, interest rates and growth. I believe that will determine the investment outcome for the next year – and maybe years – ahead.
What are your expectations for 2022?
If I had my glass half empty hat on, I would say that things could be quite tricky in 2022, particularly economically, as governments are having to tighten their purses, and central banks are unable to help, as we maybe see a tightening cycle on the monetary side. Therefore, I think consumers will be asked to take on quite a bit of that burden and may find themselves quite strained. Having said that, putting the glass half full hat on, if we do see a post-pandemic normalisation with consumers back out spending, then we may see certain areas of the economy, such as leisure and travel, doing much better.
What is the biggest risk facing companies?
Clearly, this is the input cost inflation that we have started to see already; the tightening of supply chains, input cost increases coming through from commodity prices, but also wage increases. The debate as to whether these inflation increases are transitory is still raging and, if we were to see more persistent – particularly wage – increases coming through next year, then that would be more difficult for equities as companies would find it more difficult on the margin front.
How are you positioning UK Alpha?
We are relatively defensively positioned, and still want to own those compounding growth companies that typically are cash-generative, defensive and, come what may next year, will continue to grow their profits and, therefore, their cash flows and be able to reinvest those at good rates of return. On the other hand, I do own cyclicals, particularly around travel and leisure that can potentially normalise their revenue streams into next year. I do think you will start to see airlines, particularly in short haul, fill again and also people back in pubs and restaurants.
Which companies have benefited from the pandemic?
The pandemic has clearly been terrible for most, however, there have been companies where it may have accelerated their growth opportunities. For example, some of the European low-cost airlines have seen their competitors go bust.
On the UK high street, those companies with a very attractive online proposition have prospered, while many competitors have really fallen behind as online shopping has accelerated. Therefore, if you find the right companies in the right areas that are able to benefit from some of the wider trends we are seeing in the economy, then there are some good opportunities ahead.
