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Hear from Witan’s managers on what Q1 could hold in store for markets

A bumpier but still positive outlook

Our regular polling of our managers’ views on the outlook identified the following themes for 2022 and beyond:

  • Inflation. This seems likely to peak soon but will remain higher than pre-pandemic. Companies unable to pass on material and labour costs will suffer relative to those with pricing power.

  • Tightening liquidity. Central banks are responding to the surge in inflation by raising rates and reducing emergency liquidity provision. This will change the mix of winners and losers within stock markets. Shifting the focus onto earnings will provide a headwind for more speculatively rated assets.

  • The virus. Uncertainty over the duration of Omicron-related restrictions is balanced by some optimism that it could mark the end of the 2-year pandemic, in favour of learning to live with Covid.

  • Growth prospects. Near term, there is pent up demand as economies reopen, while longer-term hopes rest on established growth companies and the overlapping themes of infrastructure spending and investment to meet climate change targets.

Although some managers favour companies with undervalued near-term recovery prospects while others favour proven long-term growth, the common thread is that a more selective approach may be needed as super-abundant liquidity is reined in. The public authorities’ policies seem likely to remain supportive of economic growth but as interest rates rise what you pay for what you get will matter more.

Below we quote some of the comments from our managers on the outlook for early 2022.

Derek Stuart, Artemis

“The effects of the Covid pandemic remain. The pandemic disruption, with the help of significant monetary stimulus, has driven inflation to a level not witnessed in years. The extent of this inflation and the response to it represent the key risks to all assets in 2022. Whilst some of the inflationary pressure may be short term, driven by supply chain disruptions, some costs, such as labour, will be difficult to reverse.

However, the evidence to date is that companies are successfully passing on these costs in terms of pricing. Whilst consumers also face cost of living increases, they enter 2022 with strong balance sheets and low unemployment. As pandemic restrictions reduce during the year consumers will return to their favoured habits of socialising and travel and we expect these areas of the economy to pick up strongly.”

Rajiv Jain, GQG

“One of the biggest challenges and opportunities in Q1 of 2022 will be navigating what we believe will be a regime of above trend inflation. Although inflation, broadly speaking, may have peaked from a rate of change perspective in late 2021; we believe that the step higher in inflation rates may be here to stay, with a higher terminal rate relative to the trend in place since the global financial crisis (i.e., 3-4% instead of 2%). The Omicron variant also poses the risk of prolonging the dysfunction in global supply chains, with elevated shipping costs and supply shortages. The energy crisis unfolding in Europe is another catalyst for inflation that shows few signs of abating. With that said, we look forward to the challenge ahead.”

Mark Baribeau, Jennison

“The Omicron variant, the Fed signaling rising rates sooner than expected, and high inflation data from continued supply chain issues and higher commodity prices could continue to challenge markets. The Fed’s stance has led investors to curtail expectations for economic growth; however, over the longer term, companies with high return on equity, strong free cash flows, and asset-light business models will likely fare better than companies forced to incur higher costs that dampen their profitability. Growth stocks do not need a roaring economy to grow, making them more attractive as GDP and corporate earnings growth revert to pre-COVID trends.

We continue to find the best growth opportunities in the same secular themes we have seen drive market leadership and profit growth over the past two years. While there may be short-term headwinds from challenging year-over-year financial comparisons and cyclical pressures, we believe accelerated trends in consumer and enterprise behavior will continue to deliver growth.”

Peter Davies, Lansdowne

“Early 2022 will be driven by the way the current Omicron wave develops. Should Northern Hemisphere countries follow the South African experience (quick and mild) investors are likely to view the endemic period of COVID as having been established, a major positive development leading to significant strength in the most disrupted areas such as travel. Should the wave prove more severe, a bumpier ride should be expected. Even in this outcome, however, we would expect markets to be thinking about a post-COVID environment by the end of the quarter.

We expect the post-COVID world to be very different to the last decade. Cyclically we expect demand to be strong, as governments, consumers and companies all look to spend and have access to capital. Supply may take a while to adjust, pressuring policymakers to withdraw exceptional support measures to curb inflation. These changes are likely to boost equities at the expense of bonds and support more pro-cyclical areas of the equity market rather than the narrow range of ‘growth’ stocks that have seen concentrated returns in recent years.

Structurally we also expect themes to change. To us the build-out of consumer internet networks is now largely complete, while brands able to profit from globalisation also see new logistic challenges emerging and their growth maturing. Conversely, we feel the investments required to boost domestic infrastructure and support the transition to carbon-reduction targets are at the very early stages of long-term uptrends.”

Michael Lindsell, Lindsell Train

“A key question for Q1 2022 and beyond will be which companies have the pricing power to offset inflationary pressures and continue posting real growth. This is something we continue to assess across the entire portfolio, but within consumer staples especially, where investor concerns are often particularly acute. To wit, we’re encouraged to note that a number of our companies are leading their industries in setting prices, demonstrating the power of their brand equity, and the strength of their belief that premiumisation as an underlying tailwind will continue.

Another area that we’re spending a lot of time on is Information Services. This sector contains some extremely attractive companies, with secular growth stories and valuable data assets, and yet, for various idiosyncratic reasons, certain pockets of opportunity are appearing. As a result, our focus on this sector will certainly continue into 2022.”

Andy Headley, Veritas

“Cost pressures are likely to have been a challenge for many companies in Q4 and so they will be reporting this in their results during Q1. This could well lead to lower forecast earnings growth for 2022 which could prompt some market disappointment given the high expectations embedded in share prices today. To combat high inflation that is proving somewhat more than transitory, central banks have started the process of removing excess liquidity (through tapering QE etc) and are preparing (or in some cases have started) to increase interest rates. Whilst these are baby steps towards a more normalised policy environment, it is possible that they have an outsized effect on asset markets. In Government bond markets, lower QE will mean less demand for those Government bonds at a time when net issuance remains high (this is particularly the case in the US where under QE, the Fed had been buying $80bn of Treasuries per month or almost $1trn per year). Lower demand for Government bonds may lead to rising interest rates across the curve (as short rates start to rise too). This could have a negative impact on equity markets and within equity markets, a more pronounced impact on high rated, high growth companies which have greater duration and therefore greater sensitivity to the risk-free rate.

Given the uncertainty in the macroeconomic environment and inflationary factors prevalent across industries, companies with high degrees of self-determination and those with pricing power will remain well positioned. In terms of opportunity, we believe there are idiosyncratic opportunities available, often in companies where the market has misunderstood the competitive intensity of the industry and penalised the valuation of companies with strong long term competitive advantages.”

Mike Trigg, WCM

“Among some of the challenges we see in the short-term is the direction of global Central Banks and the tightening of monetary policy, especially from the US Fed, the largest Central Bank in the world. It’s possible the markets are given a “rates shock” that might make it more challenging overall for equities and lead to a style rotation to certain sectors. In addition, China’s macro and regulatory environment will likely remain front and centre. Likewise, we’ll have our ear to the ground with regards how much demand might have been pulled forward because of Covid 19, especially in technology, and whether there could be a pause in demand during 1H 2022. On the flip side, we could hear from companies enjoying lessening supply chain challenges, further productivity gains and less business disruption than feared due to Omicron. This could lead to better top and bottom-line growth and be a relief to the markets. “

 

This material is a marketing communication issued and approved by Witan Investment Services Limited. Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuations and you may not get back the amount originally invested.

  Q4 2016
Q4 2017
Q4 2017
Q4 2018
Q4 2018
Q4 2019
Q4 2019
Q4 2020
Q4 2020
Q4 2021
Share Price  22.1% -8.1% 22.1% 2.7% 11.9%
Net Asset Value  19.1% -8.4% 21.3% 4.2% 15.8%
Benchmark**  15.5% -6.6% 20.1% 9.5% 19.9%

* Source: Morningstar, percentage growth to 31st December each year. Total return includes the notional investment of dividends.

** Witan’s benchmark is a composite of 85% Global (MSCI All Country World Index) and 15% UK (MSCI UK IMI Index). From 01.01.2017 to 31.12.2019 the benchmark was 30% UK, 25% North America, 20% Asia Pacific, 20% Europe (ex UK), 5% Emerging Markets. From 01.10.2007 to 31.12.2016 the benchmark was 40% UK, 20% North America, 20% Europe (ex UK) and 20% Asia Pacific.The benchmark changes since 2007 reflect a shift from the UK in favour of a more international strategic asset allocation, together with an index simplification from 2020. For more information go to www.witan.com/support/legal-information.

The views expressed herein represent those of the specific fund managers (as at the date of publication) and not those of Witan Investment Services. No reliance may be placed for any purpose on the information and opinions contained in the newsletter or their accuracy or completeness. No part of this material may be copied, photocopied or duplicated in any form or distributed to any person that is not an employee, officer, director or authorized agent of the recipient, without Witan Investment Services Limited's prior permission. Witan Investment Services Limited is registered in England no. 5272533 of 14 Queen Anne's Gate, London SW1H 9AA. Witan Investment Services Limited provides investment services and is authorised and regulated by the Financial Conduct Authority.