6 minute read
Key investment themes to watch in 2022
TIMOTHY RANGONGO Editor: MoneyMarketing
Substantial changes continue to rapidly reshape the world as we know it, with significant implications for investors. Investors have to keep considering the issues that are most likely to drive future financial, social and political developments in a way that enables them to make the decisions needed to meet their investment objectives.
As a new year begins, so do new concerns over the global economy. New restrictions related to rising Covid infections across the globe, including the emergence of the Omicron variant, are among growing concerns. The resurgence in positive cases is generally perceived as a short-term drive and shouldn’t generate significant economic damage.
With the new variant, the world is fortunately not back at square one as we were in March 2020. We have since learnt a lot about the virus; the science is moving at speed, including rising vaccination coverage levels. There is a lot that has been amassed from previous waves. There are now new tools and treatments to limit the impact on health systems. Though economic disruptions are instinctively projected, they will not destroy demand and spending outright.
Post-pandemic growth
There are expectations of strong global growth in the coming quarters, mainly owing to continued medical improvements, a consumption boost from pent-up saving, and inventory rebuilding. According to Goldman Sachs estimates, for 2022 as a whole, global GDP is likely to rise 4.5%.
“There is a growing body of evidence that vaccinations will allow economies to open up, governments to reduce lockdown restrictions, and economic activity to returnto pre-pandemic levels,” says Arthur Kamp, chief economist at Sanlam Investments.
Demand remains strong; surveys that track the pace of business activity have shown no let-up, while high-frequency data confirms this picture. Companies recorded record third-quarter profits and margins, and have plenty of room to invest and support employment in the years ahead.
Rising global inflation
As inflation balloons beyond central bank targets, monetary policy and thinking have been reshaped for the past two years. One of the greatest dangers to global financial markets in 2022 remains the threat of rising inflation.
“Supply-side bottlenecks and long delivery lead times are putting upward pressure on prices,” says Kamp, who does not expect the demand and supply mismatch presenting in many countries and industries to ease overnight. However, the good news is that central banks in the European Union, United Kingdom and the United States view today’s inflation pressures as temporary or transitory in nature.
There is a risk of an inflation blow-out in the US if policymakers get things wrong, but Kamp notes that the US Fed has acted prudently to date. “Inflation of around 2.5% is expected in the long term, which should be consistent with sustainable fiscal policy in the US; but asset managers will have to keep a close watch on what the Fed does over the course of 2022,” he says.
Arthur Kamp Chief economist at Sanlam Investments
Inflation is also top of mind in South Africa, with CPI likely to top 5% entering 2022. Much of this domestic inflation pressure is attributed to the 2020/21 commodity price boom, including fuel prices. The good news from an inflation perspective is that commodity prices are showing signs of cooling, though there will be negative impacts on state revenues.
The South African Reserve Bank’s expectation is to gradually normalise monetary policy by following up on its recent 25 basis point hike in the repo rate, with a further 75 basis points spread across 2022. Melville du Plessis, portfolio manager of the SIM Enhanced Yield and SIM Active Income funds, is not overly concerned about the 2022 interest rate trajectory.
“The market is already pricing in more interest rate hikes than we expect to come to fruition, which allows us to benefit from both the increasing interest rate environment and being able to pick up a bit of extra yield longer out on the curve,” he says.
Regulatory interventions in China
China’s economy is undergoing a profound transition, recently evidenced by surges in regulatory activity. Chinese authorities are trying to engineer a property sector slowdown, reduce coal in the energy mix, and introduce regulatory crackdowns on technology to online education sectors.
“China has a vision of ‘prosperity for all’ and this will lead to ongoing interventions in various industries; we expect more regulation and scrutiny as their economy struggles,” says Vanessa van Vuuren, portfolio manager for the SIM Small Cap and the SIM General Equity funds. SIM funds with concentrated exposure to China, through Naspers’s holding in Tencent, are allowing for the heightened risks in their valuation models.
Inasmuch as the effects of the new regulation measures are fuelling additional pressures, market pundits say these measures should be positive in the medium term as they will lead to more stable growth. Policy support is expected to keep Chinese growth above 5%.
ESG
Environmental, Social and Governance (ESG) considerations are here to stay and will likely continue to influence investors’ choices in 2022 and beyond. Allocators of capital have been singled out as essential enablers of the global climate response.
The focus into 2022 remains on extracting the maximum possible impact from each rand or dollar invested. Kamp says the COP26 Climate Change Conference held in Glasgow in November confirmed two things – first, the world is moving towards a greener future, and second, the move, however, is not happening nearly fast enough.
A central part of climate-ready investment portfolios is understanding the risks – both physical and transition – to the current and potential holdings. Value can be protected in the portfolio through various approaches, such as more detailed analysis of environmental factors via ESG analysis, measuring and cutting the carbon footprint, or reducing exposure to assets at risk from climate change.
However, protecting portfolios does not protect the planet. Fundamentally, the global call to arms is to decarbonise economies and human activity. There is a need for more capital to catalyse the changes required. New innovations to be developed. Existing ones to scale. Novel solutions to be invented.
SA’s poor credit extension
But raising capital for impact investment opportunities can prove challenging. “South Africa has made a remarkable V-shaped post-pandemic economic recovery, but for that projection to continue, we need investment spending to pick up,” warns Kamp. He adds that the country’s credit extension was weak, in real terms, and made worse by battling a “depression level” unemployment rate.
“Asset managers can and do play acritical role in resolving unemployment, particularly in the SME debt space,” says Nersan Naidoo, CEO of Sanlam Investments. “These SMEs, in turn, play a key part in creating jobs and economic growth.” But, he says, a range of issues need to be addressed to meet the credit extension theme head-on, not least of which is how the government’s large borrowing requirement is ‘crowding out’ private sector credit extension.
Fiscal constraints
South Africa is facing real challenges in stabilising its debt, and even with prudent fiscal management, the Treasury expects the country’s debt-to-GDP to increase to 78% by 2025/26. “The problem is that the effective real interest rate we are paying on our debt is significantly higher than the real growth rate of the economy, and while that is the case, you have to run a big primary budget surplus,” says Kamp.
He says that government would have to rein in expenditure, a feature that could prove challenging given the socioeconomic pressures linked to inequality, poverty and unemployment. The country’s best hope is to grow the economy faster and for capital allocators to deploy capital with maximum impact for all citizens.
Vanessa van Vuuren Portfolio manager for the SIM Small Cap and the SIM General Equity funds
Nersan Naidoo CEO of Sanlam Investments
