“The mid-cycle phase of the business cycle usually leads to more volatility, and it likely will be again,” said William Sels, chief investment officer of HSBC Private Banking and Wealth Management.
He added that given the rally in 2021 and the persistence of mixed economic data on growth and inflation, “investor sentiment will also be volatile.”
There were periods of heightened volatility throughout 2021 with the Cboe volatility index, known as the volatility index, reaching 37 in late January and 31 in early December. However, its average for the year is 24 and at the time it dropped to 14.
Inflation expectations, which have already dominated market discussions in recent months, will play a key role in this volatility, according to Geir Lode, head of global equities within Federated Hermes’ international operations.
In fact, Lode and Sels agree that the biggest risk to the markets is that central banks make the wrong choice in their interest rate policies.
“If they got too hawkish and raised interest rates too quickly, it could cause market sentiment to deteriorate significantly,” Sels said.
This echoes the findings of a survey by the Association of Investment Firms in November which found managers’ biggest fear is rising interest rates, with 20% saying it was the biggest threat to the stock market in 2022 and the second biggest threat is rising inflation. (17%).
Alex Crooke, fund manager of Bankers Investment Trust, explained that the key to stock picking in 2022 will be “reading central banks’ response to inflation.”
Persistent inflation will benefit companies that have “the ability to pass these prices on while others will struggle because customers respond by reducing orders,” he said.
Inflation is currently playing its part in slowing stock valuations, according to Lode, with comparable earnings looking more difficult as well.
In fact, DWS believes valuations have peaked.
“Stocks will continue to be among the most productive investments over the coming year, but the price potential is significantly lower than in the current year,” said Marcus Poppe, fund manager for equities global society.
Sels echoed this sentiment, saying 2022 will herald positive returns, but to a lesser extent than in 2021 and with “a bit more volatility.”
It is in this context that experts approach what Sels called “the biggest debate” – whether the US stock market can continue to outperform European markets.
The US market dominated its European counterpart this year (through December 8) with a return of 29.2% for the MSCI USA index and 17.6% for the MSCI Europe index, according to FE fundinfo.
However, the concentration of the S & P500 has led economists and fund managers to declare the index to be overvalued. The seven largest companies in the index, all of which are technology companies, represent 27% from 24% at the start of the year.
Yet while for valuation reasons Sels increased its allocation to Europe, the United States remains its largest overweight.
“This is in part because when comparing total returns, investors are expected to benefit from a further appreciation of the dollar in 2022,” he said. “Additionally, we like the fact that the US market is full of quality stocks, while Europe is a relatively cyclical market. We believe that global economic growth will slow down somewhat next year from the recent very rapid pace, and therefore we are trying to reduce the cyclicality of our positions somewhat. “
However, for Poppe, the debate around European stocks versus US stocks is one of growth versus value.
“Europe has a much higher proportion of value stocks, while the United States is much better placed in the tech sector,” he said.
So while European stocks are less valued, “that doesn’t mean they have a higher upside potential,” he explained.
“As long as real returns remain in negative territory, growth stocks should continue to outperform,” Poppe said before adding, “if interest rates rise more sharply, on the other hand, value stocks which are not. not so sensitive to interest rates, such as industrial or auto stocks, could benefit. “
Choice of investment funds and trusts
While the choices for global equity trusts and funds will ultimately depend on how market conditions turn throughout the year, Edison Group and FE Investments have chosen those they believe are best equipped. to weather the storm.
In the investment firm world, Sarah Godfrey, director of investment trusts at Edison Group, said her top picks are: Martin Currie Global Portfolio Trust; Bankers Investment Trust and Brunner Investment Trust.
Godfrey noted that since joining the Martin Currie Trust in 2018, manager Zehrid Osmani has created a “highly focused portfolio underpinned by a research-intensive investment process.”
She said that while Confidence has performed well in growth markets, with a total return of 72.5% of three-year NAV as of November 30, 2021, compared to + 53.1% for the MSCI ACWI, the manager’s “disciplined focus on evaluation should also provide a degree of coaching in the event of a lasting change in market leadership.”
Meanwhile, Charles Younes, research director at FE, said that while we continue to see mounting inflationary pressure and the threat of a rate hike, the Schroders Global Recover fund looks like a good bet.
“The fund is a typical value fund as it seeks to buy cheap stocks in economically sensitive and cyclical sectors such as commodities or materials and financials, which have performed well in the economic environment. current, “he said.
Younes went on to note the increased interest in ESG and impact strategies highlighting Montanaro’s Better World fund and James Hambro & Partners’ Regnan Impact Solutions.