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After back-to-back years of strong performance across most equity sectors, global markets face more uncertain prospects in 2022, says T. Rowe Price Group vice-president Jennifer O’Hara Martin, a portfolio specialist in the company’s U.S. equity division.

Martin said markets continue to be “really noisy,” driven by macro factors such as the broad spread of Covid-19 variants, elevated inflationary pressures, potential central bank tightening, and uncertainty about China’s economic and political situation.

But she stressed that opportunities still abound, especially if things break in the right direction.

“It is entirely possible that we’ll experience extreme growth [this] year if developments are skewed significantly positive,” Martin said on the latest episode of the Soundbites podcast.

She shared the microphone with Michael Arno, an associate portfolio manager and senior research analyst with Brandywine Global Investment Management, who agreed that despite market uncertainty, there are opportunities to be found in 2022.

“We think high-yield corporate credit should continue to perform well on a relative basis. The default outlook remains very benign,” Arno said. “We definitely want to be mindful of the duration risk that has crept into the high-yield space with longer-dated, lower-coupon issuance. Shorter-duration bonds of quality companies [and] solid pricing power offering attractive carry are good places to hide out right now.”

Arno said central banks will play a key role in setting the pace for returns in 2022, with several signalling rate rises and ending quantitative easing.

“So far, these banks will be reinvesting, but talks of quantitative tightening will likely occur over the coming months, given inflation pressures that we’re seeing around the world,” Arno said. “It is that shrinking balance sheet that will probably ultimately cause challenges for risk assets, both in equity and fixed income markets.”

Martin and Arno both pointed to turbulent Chinese politics in advance of an important party summit in Beijing as a further source of uncertainty.

“The signs of a policy change in China will be important for ’22, following a pretty negative credit impulse in ’21 and the crackdown across various sectors, including technology and property,” Arno said. “We’re starting to see some early signs of moderation. I wouldn’t call them aggressive. There’s been a moderate cut in the triple-R [reserve requirement ratio], and some easing up on mortgage lending, which was essentially frozen.”

Arno said one of the most important watch-points will be China’s credit impulse, which is the pace at which credit flow grows as a percentage of GDP.

“Given their concerns with overall debt levels, it’s unclear how aggressive they are going to be this time around,” he said.

Despite the turmoil, Martin said she likes several innovative equities around the globe, including:

  • Evotec AG of Germany, a health research organization providing services to the pharmaceutical, biotechnology and medical device industries. “The company has been producing solid double-digit earnings growth, which we think will continue, driven by secular tailwinds, deeper customer penetration and end markets that choose to outsource these services more often,” she said.
  • Singapore-based gaming and e-commerce platform Sea Ltd., which appears poised to benefit from demographic trends, rising wealth, better mobile infrastructure and increasing internet penetration in its target market.
  • Texas-based Charles Schwab Corp., a premier financial franchise that’s highly levered to rising short-term rates, with a sizable scale advantage. “Longer term, we believe the company can deliver durable earnings per share as it continues to gather assets, drive scale efficiencies and grow its bank with low-cost brokerage deposits,” she said.
  • China-based Kanzhun Ltd., an online recruitment platform poised for growth.

On the structured credit front, Arno said non-agency mortgages in the U.S. remain attractive.

“We see some spread pickup opportunity [and] potential for ratings boosts,” he said. “The fundamentals obviously are clearly attractive given the strong labour market, excess savings, solid household balance sheets, really good loan-to-value ratios, and the large wealth effect from rising asset prices.”

Investment grade bonds are another area where investors should be mindful of duration risk.

“The overall index is somewhere around nine years in duration,” he said. “We think some segments of the investment grade market offer some defensive characteristics, just in case we do get that accelerating inflation and the Fed has to accelerate policy faster than people think.”

Martin said balance and diversification remain a cornerstone of her investment decisions.

“Given all the opportunities and unknowns defining global equity markets today we’re balancing the portfolio to ensure it isn’t overly defined by a few stocks or sectors,” she said. “We remain focused on identifying really idiosyncratic set of names across sectors and countries with the ability to deliver durable long-term growth.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

For more insights on the year ahead, register for Canada Life’s 2022 Market Outlook Call on Jan. 13.

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