- Our sample of asset manager outlooks shows a preference for some of the big winners of 2022 – as well as losers
- The US and Japan are in favour but professional investors continue to be divided over other regions
The New Year often commences with high hopes, from living a healthier life to finally learning that foreign language. But when it comes to investment outlooks, the message is usually much more prosaic. So it is for many 2022 forecasts.
Many of the latest editions of the asset manager outlooks we parse every half-year make the case for a 2022 of positive returns, albeit with challenges, ranging from inflation to monetary tightening and whatever fresh Covid development may emerge. The prospect of bumps in the road has been amply illustrated by the fierce sell-off in tech stocks and government bonds that marked the first week of the year.
Outlooks are regularly thwarted by the sheer unknowability of the future, but they can still be of use. In the case of our sample, they offer clues about how professional investors are viewing different regions and asset classes, and why.
Hot or not?
It’s notable that the two most popular equity regions had very different fortunes in 2021. The US led markets last year, with the S&P 500 index delivering a sterling total return of around 28 per cent. Japan’s Topix index, by contrast, delivered a total return of less than 2 per cent, putting it well behind other developed market equity regions. These two proved most popular among our sample as 2021 drew to a close for very different reasons.
Eight out of the 10 firms in our sample are positive on the US, largely based on the expectation that American companies will continue to deliver superior earnings growth. The BlackRock Investment Institute, for example, is "overweight US equities on still strong earnings momentum”, adding that gradual monetary tightening should not pose significant headwinds.
Others have taken a similarly relaxed view: JPMorgan argues in its global asset allocation views for the start of 2022 that earnings growth should help to counter the high multiples on US stocks, although the firm singles out small-caps as a way to capture gains.
In our own recent assessment of the case for US smaller companies ('Time to shine for US small-caps?', IC, 7 January 2021) we noted that US smaller companies funds could be one way to focus on the region without relying too heavily on big tech stocks, as the latter may run into trouble amid concerns about inflation and faster-than-expected rate rises. This became evident in the first few days of the year, with Legg Mason Royce US Small Cap Opportunity (IE00B23Z8V29) among the best-performing US equity funds amid the tech sell-off and names such as Baillie Gifford American (GB0006061963) taking a beating.
Having lagged many of its peers in 2021, Japan seems to present a different opportunity. This market still looks cheap, particularly versus winners such as the US. Some asset managers like it because it looks “under-owned” and due a rebound while – importantly – some cite an improvement in fundamentals. Fidelity’s 2022 outlook, for one, notes an improving Covid situation and the fact that Japan's Prime Minister, Fumio Kishida, unveiled a substantial fiscal stimulus package in November. This puts it at odds with other developed economies, where central banks are either tightening conditions or considering doing this. Fidelity believes that the recent stimulus implies the country’s central bank “will have no choice but to keep policy easy”.
While not widely discussed in these outlooks, investment style could be an important consideration once again this year. Value-minded Man GLG Japan CoreAlpha Fund (GB00B0119B50) was a big winner in 2021, alongside smaller companies funds such as M&G Japan Smaller Companies (GB00B7FGLY29), and could fare well if the Japanese economy powers ahead in 2022. By contrast, quality-focused Lindsell Train Japanese Equity (IE00B7FGDC41) has struggled. As always, you may wish to diversify by style.
A difference of opinion
If there is a good level of consensus on the US and Japan, other regions have split opinion. Fund firms have moderated their views on both the UK and Europe, two of last year’s leading markets, with a lower proportion in the positive camp for both than there was in the summer (see 'What fund firms tell us about the reflation trade', IC, 23 July 2021).
In one example of a firm effectively downgrading both markets, Fidelity has called time on an overweight position in the UK and changed its view on Europe from neutral to negative. The firm notes: “The growth picture is starting to roll over in the UK and Covid cases are rising. Brexit talks have come back to the fore. Commodities prices seem to be topping out, which would hurt the UK index.”
Fidelity also points to a series of woes in Europe, from the re-imposition of Covid restrictions to the effects of a Chinese slowdown and “energy market dislocations”.
There is little enthusiasm for Asia or emerging markets among asset managers, which is unsurprising considering the challenges investors have faced in China over the past year. That said, some suspect that the worst may be over. Fidelity has a more positive view on emerging markets in Asia, “reflecting the fact that China policy tightness may be peaking, and credit tightness and supply constraints are improving”.
BlackRock adds that stricter regulation should persist, but looks unlikely to intensify this year against a backdrop of slowing growth.
With inflation and interest rate rises dominating the agenda, 2022 could be fairly ugly for bond investors – especially those most exposed to a shift in monetary policy. This explains why 70 per cent of the sample we looked at had negative views on government bonds, with investment grade corporate debt seeing similar levels of negativity.
But a good number of asset managers do remain positive, or at least neutral, on high-yield corporate debt, a standout performer last year. Some firms have stressed that company fundamentals still look good, with limited risk of borrowers defaulting on their debt, although conditions may be less favourable than they were in 2021. Flexible bond funds with a heavy preference for riskier debt, such as Royal London Sterling Extra Yield Bond (IE00BJBQC361), can provide a more diversified exposure than dedicated high-yield bond funds.
Most of the asset managers with a view on emerging market debt were either positive or neutral. This is partly because it looks cheaper than other forms of fixed income by certain measures. But if you invest in emerging market debt, you are taking on a good deal of risk and volatility. For example, last year just 16 out of 116 funds in the Investment Association global emerging market bond sectors made a positive total return.