Investors will need to adopt careful sector and stock-by-stock selection strategies to navigate the coming year as regime-changing conditions continue to favour shares over bonds, according to the latest Salt Funds Management analysis.
The Salt ‘Global Outlook’ published last week says while share markets may deliver annual returns in 2022 in tune with the long-term average of about 8 per cent, the experience is unlikely to be smooth or evenly distributed.
Amid rising uncertainty – fueled by risks including inflation, interest rates and geo-politics – certain sectors and stocks will continue to offer “scope for resilience and desirable investment features”, the Salt paper says, citing listed real assets as one attractive option.
Sectors including utilities, consumer staples, healthcare and ‘software as a service’ technology also appeal as safe-havens from the “sentiment storms” Salt expects to periodically buffet markets this year.
“De-rating in very overvalued equities (specific companies, rather than sectors) is likely as interest rates move up,” the report says, with the ‘hot stock’ internet-fueled, meme-mentality set to fade as “utopian” growth hopes falter.
“The utopian growth mix has been a huge beneficiary of a decade of easy money, internet adoption and cultural factors favouring perceived ‘disruption’, individualism and armchair anti-authoritarianism,” the Salt paper says. “However, its prospects are vulnerable to a higher cost of funds in future years, as well as to inevitable instances of technological disappointment, or of simple shocks arising from old-fashioned geopolitics.”
But if equities look challenging over 2022, fixed income provides investors with an even bigger conundrum over the next two years.
“Despite anticipating volatility as market leadership changes continue, we still prefer equity to fixed income or cash exposure,” the Salt report says. “The negative real (after-inflation) yields dogging fixed income will persist for at least two years, and makes higher Fixed Income asset class holdings inopportune.”
Greg Fleming, Salt diversified funds head, said while vanilla bond exposure looks like an unattractive short- to medium-term prospect, there are pockets of potential value in fixed income markets.
For example, Fleming said the emerging ‘green bond’ sector holds some promise for investors while other opportunities remain in higher quality credit – in the AA- to AAA-rated range.
“There’s more green bond issuances coming up,” he said. “But the better ones are project-related… We’d like to see more longer duration green bonds too.”
For the time-being, Salt is leaning to real assets as portfolio “bond substitutes”, Fleming said, such as global property and infrastructure. The Auckland-based firm recently launched two new funds playing to the listed international real estate and infrastructure sectors, respectively, managed by the US-based, Cohen & Steers.
As markets shift gear to meet changing interest rate and inflationary conditions – already evident in share volatility this month – the report says investors will benefit from allocating to “all-weather” assets.
“Such desirable investments, which we are actively seeking out across all our asset classes, are resilient to both inflation and to profit challenges in a less stimulus-based, endogenous phase of economic growth,” the Salt paper says.