John Stopford, Head of Multi Asset Income and Co Portfolio Manager, Diversified Income and Global Income Opportunities Funds:
We think things could actually turn out better in terms of rate expectations than perhaps the market is beginning to fear.
What is your outlook for 2022?
We would argue valuations within income-generating assets look relatively attractive, both in terms of good quality, high-yielding equities, and elements of the credit market. I think we are getting to a point where some markets are already pricing in a significant normalisation in policy and investors are also pricing in higher inflation. Next year might start with some of the themes that are playing out currently – caution in terms of both growth and policy – but we expect some pretty exciting opportunities for resilient income investors such as ourselves, particularly from the bottom up.
How do you expect this normalisation in policy to play out?
Policymakers are gradually removing super-easy policy, initially through running down their quantitative easing programmes and then, ultimately, we may get higher interest rates. However, the market’s current fixation is the extent to which inflation is likely to be transient or longer lasting. Whilst we think that there are medium-term inflation pressures, we are probably close to peak bottleneck, peak supply pressure, inflation and base effects going into next year could be significant.
There is quite a lot already priced into some markets in terms of higher rates. Additionally, central banks might get away with doing a bit less or being under less pressure if inflation starts to come back down towards target into the middle to second-half of 2022. Therefore, we think things could actually turn out better in terms of rate expectations than perhaps the market is beginning to fear.
Will you add more risk in 2022?
We think that there may be an opportunity to add exposure in areas that are looking a little bit out of favour or distressed, but it is important to be selective. It is not as easy an environment in terms of loose policy and strong growth that we saw in 2020 and early 2021. It is going to be more mixed, but we think we are getting to a point where investors are potentially beginning to price in too much risk in terms of inflation, policy tightening and weak growth, and that should present opportunities.
