Manager predictions for 2022 and beyond.
Investment company managers have tipped renewable energy infrastructure to be the best performing asset class of 2022, according to the annual poll conducted by the Association of Investment Companies (AIC). The poll was carried out with AIC member investment company managers between and 8 and 30 November 2021.
Renewable energy infrastructure attracted 18% of managers’ votes, with mid-cap equities following close behind with 17%. When asked to predict the best performing region in 2022, a quarter (25%) selected the UK, while a fifth (20%) chose emerging markets. There was also support for Asia Pacific excluding Japan and the US (both at 15%).
On a five-year view, managers’ favoured regions are similar. The UK, Emerging Markets and Asia Pacific excluding Japan are seen as offering the most attractive medium-term opportunities, each receiving 20% of the votes, followed by the US (17%).
Managers’ greatest fear is interest rates rising, with 20% seeing this as the biggest threat to the stock market in 2022. Nine out of ten managers believe interest rates will go up in 2022. Linked to this, the second biggest threat in 2022 is a rise in inflation (17%).
However, an extended period of high inflation is seen as a long shot. Only 15% of managers expect inflation to top 5% over the next three years, while 65% reckon this is unlikely or very unlikely.
Alternative energy and REITs are the two stock market sectors expected to perform best in 2022, each receiving 12% of managers’ votes.
On a five-year view, managers think Software and Computer Services presents the most attractive opportunities (35% of respondents selected the sector).
Investment company managers are optimistic on the prospects for global stock markets in 2022, with 75% believing they will rise versus 10% expecting a fall. When asked about where they think the FTSE 100 will close at the end of 2022, 50% of managers thought it would close between 7,500 and 8,000 – higher than its current level of around 7,300. Only 5% thought it would close below 7,000 and an optimistic 5% predicted a close above 8,000.
Managers believe the greatest cause for optimism in 2022 is the threat from COVID-19 receding, gaining 21% of their votes. However, this survey was completed before the new variant, Omicron, was identified. The second greatest cause for optimism was supply chain problems receding (19%), followed by technology driving economic growth (16%).
Annabel Brodie-Smith, Communications Director at the Association of Investment Companies (AIC), said: “Despite the challenges of 2021, investment company managers are optimistic about the prospects for markets in 2022, believing the threat from COVID is receding and supply chain problems are easing. Following the focus on climate change at COP26, it’s encouraging that renewable energy is tipped to be the best performer in 2022.
“The joint best performing stock market sectors are expected to be alternative energy and REITs. The latter benefited from the increase in online shopping and this year’s opening up of the economy. The UK is tipped as the most attractive region next year, with half of managers believing the FTSE 100 will close between 7,500 and 8,000. Managers clearly remain concerned about the spectre of inflation, with higher inflation and interest rates being their main worries for 2022.
“Of course, no-one has a crystal ball. Investors should focus on investing for the long term by creating a balanced portfolio which meets their needs – and, if in doubt, consult a financial adviser.”
Gervais Williams, Co-Manager of The Diverse Income Trust, said: “In 2022, we believe the current slowdown in the Chinese economy will prove to be structural in nature. Just as happened in Japan in 1989, China’s giant debt burden, combined with its aging demographics, will lead to an abrupt cessation of its growth trajectory, in our opinion. Alongside, long-dated bond yields – which are now close to zero – may start to reverse the favourable valuation trend of recent decades.
“Companies with negative cashflow that are reliant on the stock market for funding, or those that are over-levered, could be particularly vulnerable. Meanwhile, companies that generate cash surpluses each year could acquire over-levered, but otherwise viable, businesses from the receiver. So, even if things get worse, sometimes their ability to generate plentiful cash might actually improve.
“The US is a stock market dominated by high-beta stocks, and the equity-income dominated UK stock market is a low-beta one. As the challenges above become more apparent, we anticipate that a long period of high-beta underperformance and low-beta outperformance could arise. Over the next couple of decades, the UK could outperform substantially.”
Lee Qian, Manager of Keystone Positive Change Investment Trust, said: “We don't make any attempts to predict the direction of bond yields or markets. Rather, we try to understand what the next waves of innovation might be and what implications they might have for society and our planet over the next 5, 10 or 25 years. It feels as if we are on the cusp of several waves of innovation and transformation, including the energy transition, electrification, a material revolution, genetics, AI and quantum computing. Each of these waves in isolation are exciting; in combination, they could be incredibly powerful.
“Our focus is on identifying the wave makers – the companies driving change and disrupting the status quo – and to play our role in helping the development and scaling of innovative solutions to global challenges by providing long-term and supportive capital, something which has sadly become increasingly scarce over the years. By doing so, we step up to our responsibility in steering towards a more sustainable and inclusive future and can identify exceptional businesses that will deliver attractive returns for shareholders.”
Andrew Bell, Manager of Witan Investment Trust, said: “Assuming that (despite the new Omicron variant) the world is close to being able to live with COVID, 2022 should see a sustained period of reopening, economic recovery and gradual resolution of the supply chain frictions caused by politics and the pandemic. Equities where earnings exceed expectations should have a good year.
“Inflation is likely to recede from an early 2022 peak but may well settle at higher levels than pre-pandemic. This is partly due to supply chains being redesigned to prioritise ‘just in case’ rather than ‘just in time’, partly because the ‘build back better’ mantra now seeks faster growth, even at the expense of somewhat higher inflation and, importantly, because the up-front investment required to combat climate change for the benefit of future generations needs to be sold to the current electorate. This will require maintaining a positive growth backdrop and funding it with long-term borrowing rather than tax rises.
“For contrarians, the UK and emerging markets appear widely disliked and lowly valued. For the longer term, I would bet on the US growing faster than other developed economies, but its stock market reflects more good news than others and could be a wallflower in 2022."
