Investment ideas for H1 2022
In the great transformation governments and the private sector must invest to address the climate crisis and social inequalities.
Central Banks’ targets (growth, labour markets) will expand to include green/social ones.
Investing in the great transformation
Hot Macro Questions
From euphoria to slowdown?
After the exceptional growth in 2021 driven by reopening and cyclical stimuli, economic growth will likely go back to potential.
From global value chain to self independence?
Evolving geopolitics and risk of natural disasters are accelerating the push to build more national/regional supply chains.
Central Banks, from old to new mandates?
Central Banks will be forced to remain accommodative to support higher fiscal needs to finance energy and social projects.
From temporary to stickier inflation?
Supply demand mismatches, energy prices and wage pressures mean inflation will not return to pre-crisis levels.
Investor to assess 4 sources of risk
Developed market Central Banks are behind the curve in their assessment of inflation, just when growth slows down amid risks of new Covid variants.
Supply side constraints prove difficult to overcome and pricing pressures prevail, hurting earnings and margins.
Geopolitical tensions will prevail, as global order is reset and US supremacy ends, leaving a global political vacuum.
As stimulus is withdrawn amid excessive leverage in some areas, businesses may be unable to cope with slowing growth.
Policy mistakes
Developed market Central Banks are behind the curve in their assessment of inflation, just when growth slows down amid risks of new Covid variants.
Developed market Central Banks are behind the curve in their assessment of inflation, just when growth slows down amid risks of new Covid variants.
Supply bottlenecks
Supply side constraints prove difficult to overcome and pricing pressures prevail, hurting earnings and margins.
Supply side constraints prove difficult to overcome and pricing pressures prevail, hurting earnings and margins.
Geopolitical tensions
Geopolitical tensions will prevail, as global order is reset and US supremacy ends, leaving a global political vacuum.
Geopolitical tensions will prevail, as global order is reset and US supremacy ends, leaving a global political vacuum.
Corporate defaults
As stimulus is withdrawn amid excessive leverage in some areas, businesses may be unable to cope with slowing growth.
As stimulus is withdrawn amid excessive leverage in some areas, businesses may be unable to cope with slowing growth.
Overall Risk Sentiment
We stay risk neutral, more vigilant and look for better entry points, as valuations are high, inflation is proving permanent and growth slows down.
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Guidelines and main changes vs H1
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| Overall risk sentiment is a qualitative view of the overall risk assessment of the most recent global investment committee. | |
Key convictions for an era of regime shift
10 key messages from the 2022 investment outlook
1 |
In the battle of narratives, the ‘road back to 70 s’ gains traction |
2 |
Central Banks hold the key to the cycle |
3 |
After an initial tiptoe into tapering, expect more, not less, monetary accommodation |
4 |
The cycle will extend further, but frenzied markets are no longer in sight |
5 |
The concept of EM as a block is definitely over |
6 |
For investors, targeting real returns is the new horizon, but beware of the nominal illusion |
7 |
Real rates will determine the fate of excessive equity valuations. The capping of nominal rates is not forever, therefore investors should resist the temptation to go long duration. |
8 |
Equities are a structural engine of returns and investors should play equities through an inflation lens: value, dividend, infrastructure. |
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Some cracks relating to leverage issues will come to the surface. |
10 |
The green and social recovery will push towards ESG mainstreaming, but the transition will not be linear. |
2022 Investment Outlook - Investing in the great transformation
Investment themes for H1 2022
As central banks cautiously assess inflation risk, there’s a seeping realisation that some components of inflation will not be transitory. Policymakers nonetheless maintain a benign neglect of inflation and continue financial repression, in part a result of the huge debt piled up by governments due to massive fiscal stimulus. We argue this will not recede as quickly as markets believe, presenting the case for more and not less accommodation amid slowing growth momentum and need to finance the energy transition. Yet, despite the ongoing stagflation debate, companies are able to pass on rising input costs to consumers and navigate supply chain bottlenecks. It’s key here to look for future wage growth pressures and for pricing power sustainability.
Vincent MortierIn 2022, investors cannot expect 2021 level returns for equities, amid an environment of normalising earnings growth and mounting pressure on margins.
Pressure on government bonds will continue, while interest rates will start rising. With real yields globally in the low range, the search for real income will continue.
The key elements to consider in portfolio construction will be return, liquidity risk and exposure to growth and inflation.
Deputy CIO
This means looking for income in high yielding areas of short duration credit, including EM bonds and in real assets. In light of some asymmetric risks and high valuations, investors should stay neutral in equities, looking for better entry levels but selectively playing on value, quality and dividend themes. Nevertheless changing correlation between equity and bond underscore the need for an active total allocation mindset.
Finally, the push towards a greener and more equitable world means demand for investment products that promote these objectives will only increase, helping them into the mainstream of investors’ portfolios.
ACTIVE ALLOCATION:
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INCOME:
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EQUITIES:
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ESG GOES MAINSTREAM:
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