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Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.

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Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.

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Road to recovery or path of potholes?

Road to recovery or path of potholes?

10 Investment themes to watch in 2022

As the curtain closed on another year of surprises, investors are hoping for smoother sailing this year. But with inflation on the rise and a new Omicron variant in the mix, the outlook is far from clear. Against this backdrop, we asked some of our leading Portfolio Managers what issues will be on their watchlist as 2022 unfolds.

1. Remain focused on quality companies amid macro volatility

The FSSA Investment Managers team reiterates the importance of identifying quality companies that are uncorrelated to the macroeconomic environment.

“In 2022, we believe interest rates will rise in Asia and the liquidity environment may be less favourable. As interest rates rise and liquidity tightens, we believe the market will become more volatile and some of the more expensively valued, over-crowded sectors could be vulnerable,” said Martin Lau, Managing Partner of FSSA Investment Managers.

Despite the external environment, the FSSA Investment Managers team believes that by focusing on investing in the highest quality companies in the region, the portfolios are well positioned to generate attractive risk-adjusted returns. Whatever happens, the best companies will either prosper in easier times or suffer the least when times are tough.

2. Rethinking risks and opportunities in China equities

Over the past year we have witnessed a dramatic change in sentiment towards the China equities market.

“At the end of 2020, most people were positive on China. Since then the sentiment has turned 180 degrees and now many investors are concerned about the Chinese market, in particular the property and internet sectors,” Mr. Lau said, describing this shift as “a healthy reverse in sentiment and awareness towards risks in the market.”

“We believe that in 2022, as some of the uncertainties clear up, there could be opportunities in these areas,” Mr Lau said. “The recent RRR cuts in July and December signalled that Beijing is willing to add some cushion to the slowing economy. Meanwhile valuations have fallen to more reasonable levels. As rates start to tighten elsewhere, China may look more attractive to global investors.”

3. Diversification remains the key to remaining invested

Although financial markets have stabilised from the extreme movements seen following the initial phase of the pandemic, new risks have emerged in the system, according to Kej Somaia, Co-Head of Multi-Asset Solutions.

“While continued economic growth suggests equities may have further to run as we approach 2022, stretched valuations, spiking inflation, and potentially tighter monetary policy mean that asset allocators must draw on a variety of levers to navigate what promises to be a volatile year ahead. Static allocations to passive exposures in fixed income and equities are not advisable in this environment, while expanding your portfolio toolkit to include inflation sensitive assets such as commodities and property are recommended, given their inflation linkages.”

In recent months, his team’s portfolio positioning has focused on the balance between equities and bonds, with a focus on reducing the allocation to growth. “We have made a marginal increase to fixed income exposures allocated to shorter-dated rather than longer-dated bonds to reduce the portfolio’s sensitivity and risk to rising yields. We have also retained all the global equity exposures in foreign currencies to provide a buffer in an environment where the Australian dollar falls,” Mr Somaia said.

4. Monetary policies normalisation in US and Europe unlikely to derail Asian economic recovery

Despite the fact that inflation is stubbornly high in developed economies and potential changes to monetary policy settings led by the US Fed would affect investors’ sentiments, Asian economies are expected to fare better than other regions. For instance, countries like India and Indonesia, both of which have been adversely affected by rate hikes in the US, now appear to be in a much better shape.

“India has recovered strongly from a dire Covid-affected period, and looks set to maintain its investment grade credit rating. Moody’s has changed the sovereign outlook from negative to stable, which has reduced the risk of many Indian investment grade credits being downgraded to high yield,” said Nigel Foo, Head of Asia Fixed Income.

“Indonesia has also recovered strongly from the pandemic and has benefitted from higher commodity prices, which have helped improve its financial position as a major exporter of coal and crude palm oil. The stronger balance of payments position, benign inflation and only modest foreign ownership in the local currency government bond market suggests Indonesia will be able to withstand interest rate hikes in the US better than it has in the past.”

5. Supply outlook appears favorable for Asian credit

“We believe demand from income-oriented investors will continue to dwarf supply, particularly if we see an improvement in sentiment towards Chinese names,” said Mr Foo.

“Projections suggest gross supply this year will be little changed from 2021. In fact, we believe some maturities this year might already have been pre-funded, with companies taking advantage of low rates in anticipation of higher borrowing costs going forward. Moreover, corporates in India and Indonesia should benefit from the continued improvement in onshore funding and are less reliant on USD-denominated issuance. Separately, with many issuers trading on high double-digit yields, the Chinese high yield sector is effectively closed.”

6. Reopening happening, but timing uncertain

The Global Listed Infrastructure team said that while new variants may impact timing, they are confident that the recovery will come.

Peter Meany, Head of Global Listed Infrastructure, said, “There remains scope for a recovery in traffic / passenger volumes across coronavirus-impacted infrastructure sectors such as toll roads, airports and passenger rail, following the rollout of vaccine programs. Toll road traffic volumes have proved more resilient than those of other transport infrastructure assets; and operators such as Transurban and Vinci are leading the way towards a return to normal demand levels.”

The Global Property Securities team expects the hotel sector to continue seeing lower levels of international and business travel in 2022.

“Assets located in global gateway cities that traditionally catered to international tourists and business travellers, will likely continue to suffer in the short to medium term. However, we believe that investment opportunities exist within domestic leisure assets, as local tourism fundamentals are expected to remain strong into 2022,” Stephen Hayes, Head of Global Property Securities, said.

7. Decarbonisation driving infrastructure

The global listed infrastructure asset class is positioned to benefit from a number of positive drivers over the course of the next 12 months, according to Mr Meany.

“Government attempts to bolster economic fundamentals through infrastructure and green energy stimulus plans are likely to prove supportive of many global listed infrastructure firms. In particular, the ongoing repair and replacement of old energy transmission and distribution grids, along with the accelerating build-out of renewables, should represent a steady source of utility earnings growth over many years.

“The 2021 United Nations Climate Change Conference (COP26) highlighted the scale of the work required to successfully transition away from fossil fuels. Large-cap, listed electric utilities such as NextEra Energy, Iberdrola and SSE will be at the heart of this vital transformation,” he said.

8. Hunger for data growing

Mr Meany said that ever-increasing demand for wireless data and connectivity is set to underpin steady earnings growth for Towers and Data Centres including American Tower and SBA Communications, insulating them from the ebbs and flows of the broader global economy.

“The changes required during the coronavirus pandemic have already led to a greater reliance on wireless data in many people’s everyday lives. The adoption of 5G technology over the medium term will require networks to handle increased data speed, and a much higher number of connected devices. Reflecting this, global mobile data traffic is expected to grow by a compound annual growth rate of 28% between 2021 and 2027*. Tower infrastructure will be essential to support this growth,” Mr Meany said.

9. Logistics assets in hot demand

Stephen Hayes, Head of Global Property Securities said that after a strong year for global property securities, the outlook for 2022 remains solid.

“In particular, we expect the logistics sector to continue to grow in 2022. Growth in e-commerce sales has provided a strong tailwind to the logistics sector in recent times as many retailers have had to adapt to an omni-channel strategy capturing the online marketplace. We believe this trend will continue to direct large inflows of capital to upgrading supply chains leading to continued strong tenant demand for logistics facilities.

“Whilst global trade tensions will most likely persist for the foreseeable future, we believe that the supply chain bottlenecks seen in 2021 will subside in 2022 as economies further reopen.”

10. Decentralisation reshaping cities

COVID’s impact on where people live and work will continue to play out, according to Mr Hayes.

“The residential housing sector has been a major beneficiary of the decentralisation of cities via de-urbanisation. The further adoption of flexible work practices has given more choice on the location of where people choose to live. Many gateway cities have experienced population outflows in 2021, due to affordability concerns or the desire for improved lifestyle,” he said.

In terms of office real estate, the office sector will also set to follow this path of decentralisation.

Mr Hayes said, “We expect to see a continued split between heavily disrupted sky rise office towers, in favour of modern ‘A’ grade city fringe and suburban office buildings. That split between the city fringe and city centre used to be based on industry sectors, with traditional professional services in the centre, and ‘new’ sectors like technology, media and IT sectors further out. However, we believe there will be greater convergence between the new and old sectors going forward.”   

References

* Ericsson Mobility Report, November 2021

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