2022 poses abnormal market environment
Going into 2022, market cycles are “not normal by any stretch of the imagination”, according to Ninety One.
Writing in its 2022 outlook, the firm said there would be definite winners and losers in the next market cycle.
Clyde Rossouw, co-head of quality at Ninety One, said: “We are not worried about 2022 but we recognise that in this environment there are definitely winners and losers and it is not a normal cycle by any stretch of the imagination”.
This abnormal scenario had been caused by the variance in countries’ COVID-19 responses from a political and monetary policy perspective which had increased nationalism and introduce distortions in the goods markets.
The single most important driver would be the continued support of liquidity from the Federal Reserve and the European Central Bank (ECB).
“The biggest risk for equities is going to be a disorderly withdrawal of liquidity from equity markets. Liquidity support has definitely driven equity prices to the elevated levels where they are at and we also know that bond yields are probably naturally low,” he said.
“US 10-year rates sitting at well below 2%, in an environment where inflation is printing at 5%, is an inconsistency. Most people wouldn’t think that negative real interest rates is a central scenario and yet that is what we have been living with for more than 12 months now. I think the resolution of where inflation will settle is critical to understanding the outlook for 2022.”
Moving onto stocks, Rossouw said he was exploring stocks in the technology space, primarily those which had clear pricing power.
“I think it is also important for investors who own technological stocks to own the technology stocks with pricing power. It is not particularly helpful to own deflationary hardware businesses or businesses that are struggling to push price increases on.
“Pricing power in technology is important because that will offset an investor’s interest rate risk.”
His colleague, Rhynhardt Roodt, co-portfolio manager for the Global Dynamic Equity Strategies, was also favourably positioned towards technology.
“We are focusing on sectors showing strong earnings growth, which we believe will be sustainable into 2022 and areas such as information technology, where we are finding the greatest concentratation of attractive structural growth opportunities,” he said.
“The argument in favour of equities rests upon their attractiveness relative to other asset classes. Despite the recent rise in longer-dated bond yields, this remains valid. However, it seems unlikely we will enjoy any further expansion of valuation multiples through a broad rise in market levels. The sustainability of the current bull run will be dependant on companies growing profits into current valuation levels.”
AUTHOR
Laura Dew
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