After closing out a third straight year of double-digit returns, the US stock market’s continued rise has stalled on investor concerns about potential monetary policy changes as inflationary pressures and Covid variants roil the economy’s nascent recovery. As a result, equity investors remain wary while income-seeking investors continue to search for yield.
Where may investors find opportunities in 2022? Here is what portfolio managers, strategists, and executives from Natixis Investment Managers and its affiliated investment firms say they expect:
Commercial Property Markets Get Boost from Improving Fundamentals by Michael Acton, managing director, director of research, AEW Capital Management, L.P.
U.S. commercial property markets showed broadly improving demand characteristics during the second half of 2021 as the pandemic related activity restrictions waned. Strong and accelerating demand remains most visible in apartment and industrial properties but is also picking up for most retail property formats. How (and how much) office tenants will use space going forward remains unclear and it seems likely that aggregate new demand for office space will remain weak, at best, in the near-term. For 2022, we expect these trends to continue and possibly accelerate, particularly in the case of apartment properties given the very strong growth in housing prices in most markets during 2021. In the near-term, higher home prices should translate into more renters while also creating more “headroom” for apartment rental rate increases.
Current bond market pricing (i.e.forward Treasury yields and expected inflation) indicate negative real Treasury yields for the foreseeable future. If correct, persistent negative real yields will likely continue to direct capital into a wide range of return seeking and/or yield enhancing asset classes with real assets generally and income producing commercial property specifically remaining highly attractive to myriad investors around the globe. Even with the recent increase in Treasury yields, U.S. commercial property pricing remains highly attractive on a spread basis with property yields holding near the twenty-year average spread to Treasury yields.
Improving property market fundamentals combined with strong investor interest and related capital flows suggest continued near-term outsized investment returns for commercial property. Yields for the strongest income growth property sectors continue to compress and capital continues to push into less conventional property sectors in search of higher yield and potentially stronger growth. We continue to find significant opportunities in property sectors such as cold storage, life sciences, seniors housing, medical offices and various parts of the broader health care property sector.
Strong Growth & Positive Momentum in Short Term Real Assets in 2022 By François Collet Gérant, Fund manager at DNCA
2021 will remain the year of records. Growth and inflation, showed levels not seen for several decades. If growth was expected to bounce back after 2020 rout, inflation came as a big surprise for almost everyone starting by central banks. The many other surprises of the year coming from commodity prices, lockdowns or other did not disturb stock markets in the backdrop of strong earnings and easy money provided by extraordinarily accommodative monetary policy.
Our economic scenario at the start of 2022 relies on a still dynamic growth driven both by consumer spending but also by investment geared towards the reorganization of the supply chain and the energy transition. In the latter area, public expenditure will be largely involved. Regarding inflation, it appears to us to be more resilient than currently anticipated due to the continuing imbalance between supply and demand which now affects not only goods but also the labor market. While there is not yet a question of strong corrective measures for fiscal deficits, central banks will nonetheless be forced to withdraw stimulus.
Therefore, if the economic outlook still appears shiny, financial conditions should start to be less favorable. In this context, our asset allocation should favor short term real assets with attractive risk premia. This will imply enhanced allocation toward European and Emerging stock markets for the equity side and inflation linked bonds and Emerging sovereign debt for the fixed income side.
European Financials Offer Compelling Opportunity in 2022 by Daniel Nicholas, client portfolio manager at Harris Associates
Our portfolio is positioned in real time to reflect our forward-looking outlook. Names with the largest weightings generally align with our expectations for the best risk rewards. Today, we believe European financials offer a compelling opportunity.
We think our European financials are well positioned to experience positive excess returns in the future due to several factors:
- Rising Interest Rates: We believe that the combination of GDP growth and inflation pressure will drive interest rates higher over the next few years. We expect rising interest rates to magnify the existing level of profitability for each of our financials.
- Capital Position: As a result of regulatory measures from the global financial crisis and again during the Covid-19 pandemic, the banks we are invested in have outsized capital positions on their balance sheets. We expect this to not only protect investors from adverse economic conditions or systematic shocks, but also improve the sentiment of banks that were once perceived as risky. We expect excess capital to be returned to shareholders at an accelerating pace in the future.
- Margin Expansion Opportunity: We are pleased with the cost reduction programs the banks have invested in during this extended period of historically low interest rates. Despite pressure on net interest margins, the banks we are invested in have been able to maintain and/or grow profitability because of reduced cost structures. Should interest rates rise modestly, we expect margins to expand significantly, which could warrant a multiple re-rating.
Finding Opportunity in a Volatile Environment by Lynda Schweitzer, vice president, portfolio manager and co-head of global fixed income at Loomis Sayles
2022 is likely to be a transition year for the global markets as the world continues to reopen from the 2020 COVID-19 downturn. Global recovery is firmly on track with most countries expected to register above-trend growth. China is the notable exception due to the impact of ongoing stress in its property market. Although the global recovery is progressing, it has been somewhat disjointed and asynchronous due to varying COVID-19 protocols, vaccination rates and central bank reactions. I expect this uneven pattern to continue into 2022.
The primary drivers of the asynchronous global recovery will remain similar to last year: COVID-19, inflation, supply chain disruptions and China growth fears; however, the new dynamic this year will be the removal of stimulus by global central banks. Inflation has surprised to the upside in most places, albeit to varying degrees. As we progress through 2022, we will get more evidence of how persistent inflation is likely to be. This will impact both long-term inflation expectations and central bank reaction functions. The market’s interpretation and subsequent pricing of both factors is likely to lead to volatility across the global fixed income asset classes, including credit spreads, rates, and FX.
The US has been at the forefront of this cycle, but we should see focus on the US peak during 2022 as attention shifts to other global markets at various stages of recovery, inflation, and central bank actions. The best opportunities may come outside the US market in 2022.
TINA is Alive and Well by Jack Janasiewicz, lead portfolio strategist and portfolio manager, Natixis Investment Managers Solutions
Coming off a huge equity rally, can stocks do it again in 2022? The Wall of Worry is certainly formidable with a lengthy list of concerns: inflation, labor markets, supply chain issues, midterm elections, China/Taiwan, Russia/Ukraine, central bank rate hikes, valuations, COVID variants and plenty more. With many of these expected to linger, it’s understandable that investors remain far from bullish. But even skeptics can be converted to bulls at some point.
What could give skeptics a reason to flip optimistic heading into 2022? If our expectations pan out, we should have more clarity on many of these worries by summer. As the Omicron variant becomes the dominant strain of COVID, and if its more contagious but less virulent surge leaves more people infected but with only mild symptoms if any, as many experts expect, more of the population may become immune either naturally or through vaccination. Easing COVID concerns should help the global economy normalize allowing supply chain disruptions to wane and labor markets to recover in earnest. In this scenario, inflation is likely to peak early in 2022 before easing into year-end. Tack on modest fiscal tightening and tapering at the Federal level and the market may do much of the Federal Open Market Committee’s bidding for them.
Additionally, nominal growth, while slowing, should remain well above trend for the duration of the year. From inventory rebuilding and a prolonged capex cycle to robust consumer spending and increasing export demand, these catalysts should support a higher growth regime than many might be expecting. Housing also looks set to play a strong role in supporting growth. Low rates, a shortage of affordable houses and the Millennial home-buying boom are all key drivers. Add ancillary beneficiaries of new construction – i.e. appliances, home furnishings – and consumer spending should also remain strong. Lastly, we believe the fiscal cliff may not be quite as ominous as some predict. State and local revenues have pushed sharply above trend levels due to rising tax proceeds from consumption and higher property values while budgets were slashed as public leaders battened down the hatches during the COVID crisis. This surplus revenue will be spent in time, partially offsetting that Federal-level fiscal cliff.
So, there are plenty of reasons for optimism heading into 2022. But what drives stock prices? Earnings. And if we learned anything during 2021, we know that corporate America is doing just fine dealing with increased input costs and higher wages. Margin compression worries were laid to rest quarters ago and the operating leverage gains accrued during the pandemic won’t evaporate overnight. Early indications in earnings reports so far point to continued margin improvements, robust organic growth, and strong EPS growth. With the catalysts in place for a higher nominal GDP growth regime at least for 2022, we may again see that we underappreciate the flexibility and entrepreneurial drive of corporate America. Further, with yields still well below long-term expected inflation rates, what else are you going to own? TINA is alive and well.
Uncertainties Remain But Select Sustainable Equities Look Attractive by Jens Peers,CEO and CIO, Mirova US
2022 looks like it will be another positive but volatile year. While the global economy is expected to continue its recovery, many uncertainties remain the same. Covid, inflation and supply chain issues, central bank action, and geopolitical issues, are expected to be the main drivers for markets. We do expect many of those issues to ease in the second half of the year. Covid vaccination rates and the development of vaccines that are more effective against the new variants should allow economies to fully reopen. This in turn may ease the pressure on inflation and supply chains more generally.
In this context, we find Equities more attractive than Bonds. Cyclical sectors are expected to outperform in both Equities and Fixed Income. Within Fixed Income, we prefer High Yield over Investment Grade and subordinated Debt. The expected infrastructure investment plans, combined with the COP 26 commitments to achieve a net zero carbon economy in many of the largest countries in the world, should also lead to an acceleration of growth in the primary green bond market. For Equities, we see the best opportunities in banks, cyclicals exposed to the large infrastructure driven recovery plans, including green infrastructure and renewable energy, e-retail and fin-tech, electric cars and health care. Given the valuation differences, we expect Europe to outperform the US markets and also find more opportunities in Emerging Markets. Given the expected high volatility and continued high risks to a quick but sustained economic recovery, we remain prudent, and prefer companies with high quality characteristics such as relatively low levels of debt, pricing power and high visibility on recurring revenue streams.
Credit Outlook 2022: Transition Year from Ultra-Low Yields to Quite Low Yields, Once Again!
By Philippe Barthelot, CIO for credit and money markets, Ostrum Asset Management
At the very beginning of this new year, Western economies seem capable of weathering the “Cron” wave as the first publication of macro data show a strong and robust economy, though with excessive inflation, on both sides of the Atlantic. The Federal Open Market Committee is keen on hiking rates 3 times to keep it under control and avoid being perceived as too “far behind the curve” while the ECB will be on hold for a further 24 months.
This above-trend growth for 2022 is supportive for spread products at first glance. Credit quality will continue to strengthen with more upgrades than downgrades (plus all-time high interest coverage) and the default rate will stay below 2% in Europe & USA. This impressively good fundamental pillar is challenged by stretched valuations and much more net supply to occur in investment grade (IG) credits versus last year’s levels.
With less of a backstop from Central banks and likely more volatility to come due to erratic interest rate behavior, the low breakeven makes credit more sensitive to any negative event.Negative real yields, which very often stand as a support for risk assets (2021 being a proof statement) can only go one way: Upwards!
Key risks in our central scenario are uncontrolled inflation and the Chinese high yield (HY) market (with a special focus on the property sector).
All-in-all, we do expect a slight widening of spreads: +10-15 bp for IG and +30-35 bp for HY in European credit markets, leading to still positive excess returns, to a lesser extent as compared to 2021 ones. Credit markets should benefit from the “TINA” syndrome that will likely prevail in Europe for the main course of 2022; it sounds to be much less the case in the US.