As the new year begins, investors should be mindful of six key themes that could impact investment returns throughout 2022, Danny Knight, head of investment directors at Quilter Investors has said.
While markets remain at historic highs and selected opportunities are available for investors, Knight believes there are increasingly more dangers entering the market and as such investors must be alert to the risks in their portfolios.
“Although ‘the best’ may be behind us for financial markets, ‘the worst’ of the pandemic is too,” Danny Knight, head of investment directors at Quilter Investors said. “Monetary policy remains extremely loose and should rightly be reined back, accumulated savings for companies and consumers are high, which bodes well for future spending by both, while economic growth is slowing from a high, not turning negative.
“Meanwhile, company results remain robust and we can be assured that the US Federal Reserve’s micro-management of markets is here to stay; it will continue to course-correct whenever bond yields go high enough to threaten financial markets.
“However, this positive backdrop does come with some major caveats and people need to be alert to the potential for increased volatility as we live with Covid and central banks attempt to combat inflation. This means patience, prudence and diversification across regions, market capitalisations and investment styles are likely to be an investor’s greatest weapons in the coming year.”
As part of Quilter Investors’ Global Outlook, Knight has identified the six key themes investors should be paying attention to when it comes to constructing their portfolios.
The six key investment themes of 2022:
- Peak everything: “Tidal waves of stimulus have lifted everything from economic growth, corporate profits and financial markets to the price of cars, houses and raw materials. Economic growth is already slowing while company earnings growth must surely follow as government stimulus and central bank support tail away.”
- China’s growing pains: “China has introduced stringent new regulations on online gaming, financial and education stocks in its latest attempt at social engineering. Meanwhile, power cuts caused by policy changes threaten Chinese (and global) growth while the blossoming crisis in China’s over-extended property sector could still infect international financial markets and pull the rug from under global commodity prices.”
- The great payback: “As the chief economist of the World Bank observed, ‘First you worry about fighting the war; then you figure out how to pay for it.’ Ultimately, we’ll all pay for the war against the pandemic through increased corporate and personal taxes and through inflation, which acts as a stealth tax. We’re also likely to pay through the lower investment returns that we can expect in this sort of environment.”
- The climate war: “Government policy targeting much-needed green energy solutions has exerted great pressure on existing energy markets exacerbating shortages of coal and natural gas, leading to spiralling energy prices and power cuts. Meanwhile, supply-chain issues and OPEC policy continue to push up oil prices fuelling the current energy crisis.”
- Unsynchronised swimming: “The dismantling of central bank emergency measures will be far less synchronised than their arrival. This will create divergence in regional interest rates, bond markets, taxes and currencies. It also increases the risk of a policy mistake by a major central bank.”
- Bond markets lose appeal: “Central bank intervention has pushed government bond yields to new lows making the diversification benefits of bonds far less apparent, especially if inflation takes hold.”
