Fund managers say inflation, COVID-19 will be important in 2022

One of the biggest challenges for investors in 2022 will be higher interest rates as central banks move to combat rising inflation.

Futures markets are pricing in two hikes by the Federal Reserve in 2022 and at least three rate rises by the Reserve Bank of Australia.

“Rate rises will be a big thing in 2022 and following on from that, we’re definitely seeing inflation through the economy,” says Atlas Funds Management chief investment officer Hugh Dive.

“We’ll be looking at how companies can pass on those price rises. For a company like Transurban it might be easier but for a company like Ingham that’s a much harder conversation.

“You want things in your portfolio where you can pass those prices on like Transurban and Amcor.”

Alphinity’s Martin warns investors against trying to bet exactly where rates will end up.

“If your portfolio is reliant on interest rates going one way or another, you could get in trouble,” he says.

“You want stocks in your portfolio that can grow regardless of the interest rate environment.”

State Street Global Advisors has been telling clients that earnings will need to be strong in 2022 to drive market returns, particularly with bond yields likely to rise and potentially dampen valuations.

“There has been good news on that front globally in the most recent earnings season,” says State Street chief portfolio strategist Gaurav Mallik.

“Corporate earnings have surprised to the upside, and – perhaps even more importantly – forward guidance for 2022 has been strong. We believe companies are in a good position to deliver on that guidance.”

Alphinity’s Martin warns, however, that the earnings environment will be largely dependent on economic growth.

“The big unknown is what happens to growth and the big thing you don’t want to see is growth deteriorating but rates having to react to inflation – growth getting worse and rates going up is a bad scenario,” he adds.

“I don’t necessarily think that’s the base case but that will be a negative to watch out for.

“The positive scenario is that growth continues strongly and central banks are able to be measured in their response.”

There are signs, he says, of improved earnings.

“In the last year, earnings have turned out better than expected and we’re now coming into the opening up phase. All going to plan, we should get better earnings outcomes,” says Martin.

“Earnings growth should keep plodding along pretty well if economic growth is good. But there are a lot of headwinds from supply chains and those could play into next year and that could affect earnings.”

Supply chains could be just one of a number of challenges for equity markets in 2022.

“The coming year presents a complex picture as the global economy finds itself on an uncertain climb toward recovery,” says State Street’s Mallik.

“Monetary intervention is dwindling as inflation proves to be stickier than originally hoped, and bond yields could surprise to the upside. Increased volatility is also looming, as equities markets rise and fall in response to the ebb and flow of the global pandemic, and in response to policy signalling.”

But fund managers are confident the lack of returns available in other asset classes could provide a level of support to the sharemarket.

“Looking broadly at equity markets, we’re still seeing good inflows into equities,” Dive says. “Allocations aren’t going to bonds or cash. Cash is earning a negative real return, so it’s not a safe asset because you’re actually going backwards. That should support equities to some extent.”

Dive also says it isn’t necessarily time to move on from the COVID-19 winners.

“COVID-19 is still likely to hang around and we’re not going back to [pre-pandemic] 2019,” he says. “One of the more successful picks in our portfolio has been Sonic. The COVID-19 testing has just kept going, so those pandemic winners won’t be falling off a cliff.”