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With some luck, and a bit of hope, we are cautiously optimistic that 2022 should be the year in which most of the world begins to move towards a post-pandemic era — albeit after many fits and starts along the way. From a public health perspective, COVID vaccination rates and other telling numbers (including case counts, hospitalisations and virus-related deaths) suggest that the life-altering global pandemic may finally be poised to start winding down. In addition, many world economies are growing and appear to be on a path to recovery from the unprecedented COVID shock.
To be clear, we are not out of the woods just yet. The virus, with its multiple potential variants and its ability to “break through” vaccine-induced immunity in some cases, has proven difficult to entirely vanquish. And even if (as we expect) next year does bring meaningful progress, it’s critical to stress that it will not be a truly “post-COVID” world in 2022, as the virus may remain in global circulation for years to come. Nor will the economic and other improvements we anticipate be sudden or universal. Many countries still lack adequate vaccine coverage, whether due to ongoing supply issues or vaccine hesitancy among their populations. And lingering challenges around international travel and other activities we took for granted pre-COVID may well persist for the foreseeable future, making a full reversion to completely “normal” conditions an uncertain prospect anytime soon.
Nevertheless, barring a virus mutation that renders the vaccines ineffective, or some other unexpected plot twist, 2022 will hopefully mark the start of a long-overdue global rebuilding process.
The big picture: shifting tectonic plates
One of the overarching questions we keep hearing is: what exactly are we rebuilding towards? COVID has undeniably reshaped the global landscape in many ways, accelerating some long-range trends, blunting or stalling others, and indeed ushering in wholesale, lasting changes to how we live, work and travel. Could these changes cause a return to the type of slow-growth world we experienced after the 2008 global financial crisis, or are we instead pivoting to a period of sustained stronger growth? Will inflation stay stubbornly high and if so, for how long? These are some of the vexing “head scratchers” that are coming to the fore as we head into 2022, but which will take time to fully answer.
But one thing seems fairly settled at this point: COVID has hastened the onset of “big picture” structural changes to how we operate and what we value. These types of secular changes, as opposed to the cyclical changes associated with the nature of business cycles, are like the shifting tectonic plates of the investment terrain: hard to see on a day-to-day basis, but powerful longer term and, ultimately, arguably more significant than anything else. Despite the many unknowns still facing the world, here are five themes that we think should play a more prominent role in investors’ toolkits as we march inexorably towards a brave new future.
We think the supply-chain bottlenecks that are plaguing much of the world these days are unlikely to be resolved very quickly. We believe next year could easily see mismatches between supplies of many goods and demand for said goods continue (or even worsen), as more countries reopen and global economic activity picks up. Since supply constraints have been a key driver of rising inflation, we believe the most likely outlook for inflation in 2022 is that it will remain above historical average and more elevated than it has been for years. This, in turn, would likely lead to higher bond yields, especially with major central banks preparing to taper their quantitative easing (QE) programmes and laying the groundwork for interest-rate hikes going forward.
The dual spectre of rising inflation and higher bond yields has potential implications for an array of asset classes (few will be unaffected), but will, in our view, offer pockets of opportunities in more flexible fixed income strategies, as well as global macro strategies and those with an explicit mandate to mitigate the effects of inflation.
While inflationary pressures are likely to influence almost all investments to some degree, an equally important dynamic that investors should not overlook is the potential reemergence of individual company factors and characteristics as a catalyst for asset prices in 2022. As COVID’s far-reaching, dominant impact gradually recedes in the period ahead, we expect to see growing divergences between well-managed companies that look positioned for robust growth on the one hand, and on the other, companies whose poor management and shaky fundamentals were largely obscured by COVID turmoil.
We believe that seeking out quality, fundamentally sound companies that are no longer being “drowned out”, so to speak, by the macro forces of COVID, economic lockdowns and government policy support, will be an increasingly desirable investment strategy next year and beyond (Figure 2).
One of the most pervasive investment themes in today’s environment is that of decarbonisation — the global energy transition. With more pronounced changes to the world’s weather patterns becoming evident over time, many governments are moving past mere verbal commitments towards concrete regulatory steps and investment programmes aimed at combatting climate risks. This so-called “green revolution”, to some extent a large-scale reimagining of how economies work, will obviously require capital investments in order to be successful, and we believe getting on the “right side” of what is likely to be a decades-long phenomenon with transformative global potential will become increasingly mainstream next year.
Climate mitigation/adaptation strategies are one way to play this theme, but investors should also not underestimate the value and potential benefits of ESG integration in general in the context of their overall investment portfolios.
Particularly since the arrival of COVID, several secular thematic trends have broadened out and gained momentum, creating compelling new investible opportunities. These include, but are not limited to, financial technology (fintech), enterprise intelligence and innovation and a combination thereof that has recently helped to spawn the “metaverse” megatrend.
Not surprisingly, such trends reflect the global macroeconomic backdrop. For example, enterprise intelligence has been spurred on by mounting wage inflation and labour shortfalls that are pushing many companies towards automating more tasks where they can and making greater use of cloud-based computing capabilities. Such evolving corporate needs and decisions are becoming more apparent not only in developed market economies, but also in their emerging market (EM) counterparts, especially China. This will be worth watching next year.
Investors can target theme-/sector-specific strategies tied to the themes and trends that most interest them. Notably, however, thematic investing of this sort is not the same as index investing. You need to do your homework to ensure you’re buying what you really want.
Key drivers of thematic investing
Source: Wellington Management. For illustrative purposes only.
We think China’s extraordinary growth and development over the past few decades demand that it be both a topic of investment discussion and, where appropriate, perhaps a standalone portfolio allocation or the main component of an investor’s total EM exposure. Of course, this is often easier said than done, given the complexity of the Chinese economy and the systemic economic, societal and structural changes that are still going on in the country. The good news: with such seismic change comes numerous opportunities for discerning investors. However, China’s recent regulatory announcements and their well-publicised negative impact on some Chinese assets have highlighted the need for investors to properly understand and carefully evaluate these opportunities.
Thus, with the right approach, whether as a standalone positioning or within a diversified EM strategy, we believe investing in China should remain an attractive investment idea in 2022 and beyond, despite recent bouts of market volatility (Figure 5).