Where to allocate for equity performance: Natixis IM

The appeal of international small-cap equities is “undiminished” in 2022 following strong performance last year, according to Natixis Investment Managers (Natixis IM).

According to FE Analytics, within the Australian Core Strategies universe, the global small and mid-cap sector returned 23.5% during 2021. This was higher than the Australia small and mid-cap sector which returned 21.4% over the same period.

Marco Priani, senior portfolio manager for international equities at Vaughan Nelson Investment Management, an affiliate of Natixis IM, said: “Valuations are moderate from absolute and relative perspectives, currency headwinds are abating and the delayed impact of reopening and supply chain normalisation could contribute positively to fundamentals, assuming no graver COVID-19 variants emerge.”

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However, that did not mean there were no risks on the horizon for the sector, particularly geopolitical ones with Russia, China and the US, where the mid-term elections were scheduled to take place this year.

“Risks for our asset class that should be mentioned include a potential imbalance in energy supply and demand that could create energy costs for longer, and a whole set of geopolitical risks involving Russian and Chinese assertiveness as well as the responses that may generate from a large set of players, including risks of miscalculations,” Priani said.

“US political turmoil is also something to watch closely as it can even affect non-US investor sentiment.”

From a multi-asset perspective, Jens Peers, chief investment officer and chief executive at Mirova US, also a Natixis IM affiliate, said there was a preference for equities over bonds, particularly in cyclical sectors.

“For equities, we see the best opportunities in banks, cyclicals exposed to the large infrastructure driven recovery plans, including green infrastructure and renewable energy, e-retail and fintech, electric cars and health care. Given the valuation differences, we expect Europe to outperform the US markets and also find more opportunities in emerging markets,” Peers said.

“Given the expected high volatility and continued high risks to a quick but sustained economic recovery, we remain prudent, and prefer companies with high quality characteristics such as relatively low levels of debt, pricing power and high visibility on recurring revenue streams.”

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