The ten most powerful investment themes of 2022

Against a backdrop of deepening geopolitical tensions, heightened inflation and rising interest rates, First Sentier are hoping for smoother sailing this year. But with inflation on the rise the outlook is far from clear. The asset manager’s portfolio managers have listed 10 investment themes that will be on their watchlist for the remainder of the year.

Here they are:

1. Diversification remains the key to remaining invested
2. Value investing may continue its comeback
3. Investors rethinking risk assets
4. Logistics assets in hot demand
5. Decentralisation reshaping cities
6. Volatility still playing out
7. Reopening happening, but timing uncertain
8. Decarbonisation driving infrastructure
9. Hunger for data growing
10. A patchwork of company performance
    

Diversify, diversify, diversify. The golden rule of investment risk management. Economics 101 teaches you to diversify to reduce portfolio risk. But times have changed and forecasting the next 6 months have become a hard task. Kej Somaia, Co-Head of Multi-Asset Solutions says “Although financial markets have stabilised from the extreme movements seen following the initial phase of the pandemic, new risks have emerged in the system. Static allocations to passive exposures in fixed income and equities are not advisable in this environment, while expanding your portfolio toolkit to include inflation sensitive assets such as commodities and property are recommended, given their inflation linkages.”

“We have made a marginal increase to fixed income exposures allocated to shorter-dated rather than longer-dated bonds to reduce the portfolio’s sensitivity and risk to rising yields. We have also retained all the global equity exposures in foreign currencies to provide a buffer in an environment where the Australian dollar falls,” Mr Somaia said.

First Sentier Investors have been focusing on the balance between equities and bonds, while reducing their allocation to growth after witnessing an unprecedented level of divergence between Growth and Value stocks. David Walsh, Head of Investments at Realindex, said, “Beginning in January 2021, we witnessed the start of a reversion of this trend, with Value outperforming Growth in the first half of 2021. However, this trend hasn’t been sustained in recent quarters, and the market’s enthusiasm for growth stocks has returned.” 

With the US raising interest rates for the first time in years, “officials are now conceding that inflation could be more persistent than previously forecast, which could mean monetary policy settings start tightening at a time when economic growth rates are coming off the boil,” says Craig Morabito, Senior Portfolio Manager for Global Credit. Higher interest rates will have a knock-on effect for bond valuations.

Logistics and distribution supply chains have been in particular focus this year. “Growth in e-commerce sales has provided a strong tailwind to the logistics sector in recent times as many retailers have had to adapt to an omni-channel strategy capturing the online marketplace. We believe this trend will continue to direct large inflows of capital to upgrading supply chains leading to continued strong tenant demand for logistics facilities,” says Stephen Hayes, Head of Global Property Securities.

Peter Meany, Head of Global Listed Infrastructure, said, “There remains scope for a recovery in traffic / passenger volumes across coronavirus-impacted infrastructure sectors such as toll roads, airports and passenger rail, following the rollout of vaccine programs. Toll road traffic volumes have proved more resilient than those of other transport infrastructure assets; and operators such as Transurban and Vinci are leading the way towards a return to normal demand levels.”

And one of the bigger themes of this year is decarbonisation driving infrastructure. Peter Meany, Head of Global Listed Infrastructure, says “Government attempts to bolster economic fundamentals through infrastructure and green energy stimulus plans are likely to prove supportive of many global listed infrastructure firms. In particular, the ongoing repair and replacement of old energy transmission and distribution grids, along with the accelerating build-out of renewables, should represent a steady source of utility earnings growth over many years.:”

“An ongoing focus on evolving Environmental, Social and Governance (ESG) issues will also remain very important, as these factors can affect the creditworthiness of companies over time. That’s why we maintain formal ESG Risk rating for every security held in Global Credit portfolios. These assessments influence the assignment of Internal Credit Ratings, which in turn drive security selection and position sizing decisions,” says Craig Morabito, Senior Portfolio Manager for Global Credit.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.