2022 INVESTMENT THEMES

Entering the latter phases of the business cycle

Rapid recovery phase over, challenging times ahead: 2021 was a tale of fast recovery in growth post lockdowns, driven by strong consumption and a surge in government spending. For 2022, we expect an inevitable slowdown in growth closer to trend, while supply chain difficulties will continue to hamper manufacturing and retailing activity. On balance, we forecast robust growth in the year ahead, driven by catch-up consumption, infrastructure spending and corporate investment.

Overblown stagflation comparisons to the 1970s: the greatest danger to global financial markets remains the threat of rising inflation. Closely linked to this is the risk of a policy mistake, should central banks feel obliged to raise rates rapidly in response. Tighter monetary policy would threaten growth, when high energy prices are already acting as an extra tax on the world economy. We would not compare today’s recovery-driven inflation to 1970s stagflation, which was driven by severe oil supply shocks. But make no mistake! Persistently high inflation rates and uncertainty over central bank monetary policy could increase financial market volatility.

A new era in productivity growth ahead? The silver lining in the COVID-19 cloud could be faster productivity growth, resulting from businesses adapting to new ways of working during lockdowns. Indeed, owing to heavy investment in IT infrastructure to enable widespread remote working, and further investment to respond to strong demand and supply chain disruptions (boosting the demand for near shoring), productivity growth could improve markedly from post-2009 subdued growth levels.

Identifying winning investments and innovations theme: the surge in government and corporate investment will benefit a host of sectors including building materials, equipment manufacturers, industrial automation, healthcare, semiconductors, 5G telecoms equipment, software as a service (SAAS) and wind & solar energy. At a regional level, higher investment should be a boon for the manufacturing-heavy eurozone, Nordic countries and Asia (South Korea, Taiwan and Japan). 

Riding a new inflation regime: we see a substantially larger risk today that global inflation could stay higher (than over 2009-2020) for longer on the back of a potential “perfect storm” of inflation drivers. Investors would thus be well advised to diversify their portfolios away from traditional Fixed-Income instruments and into real assets and other inflation-hedged solutions. We continue to favour the underinvested Commodities asset class for inflation diversification reasons. In particular we like exposure to miners, and both precious and renewable-energy related industrial metals, such as nickel, tin and copper.

Focus on the popular circular economy – Repair, Reuse, Recycle: while ESG investing has been in vogue in recent years, the bulk of attention has been focused on renewable energy in the pursuit of lower carbon emissions. However, beyond the need to  cut carbon emissions, we must preserve our land/marine ecosystems and valuable resources, such as water. Hence our circular economy theme, which focuses on making goods and services last longer through better design and reparability, consuming fewer key resources and recycling more of what we use to reduce pollution.

The fusion of cross-media platforms with virtual worlds and augmented/virtual reality technology is the driving force behind our Enter the Metaverse theme. Younger generations are already embracing this area in the form of video games, such as Fortnite or Netflix in video streaming and Pokémon Go in augmented reality games. This is just the beginning of what we believe will be a multi-year technology megatrend, also encompassing teleconferencing and collaborative work platforms.

Edmund Shing,  Global Chief Investment Officer (PhD)