A hasty policy change by central banks, eager to control rising inflation, is the biggest downside risk for global stocks next year, according to an informal Bloomberg News survey of fund managers.
And now that the post-pandemic rally has passed its peak, this month’s survey of 106 investors also shows that more market participants are expecting value stocks to outperform stocks that soared this year based on future growth expectations. . While risks lurk, more than 40% of those surveyed pointed to a stronger economic expansion as the main bullish catalyst for 2022.
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“We believe that 2021 was a year of recovery and 2022 will be a year of resilience – investing in restructuring supply chains, digitizing businesses, innovating in healthcare and building a more sustainable planet,” said Katie Koch, Co-Director of Fundamental Equity at Goldman Sachs Asset Management, which oversees about $ 2 trillion in assets. One of the best opportunities he sees is in US small caps, as they provide “exposure to the next generation of innovators and disruptors with attractive relative valuations.”
The survey results offer a glimpse into some common industry expectations and concerns heading into 2022, following this year’s fierce rally that sent the US and Europe benchmarks to successive all-time highs. The survey was conducted by reporters who reached out to fund managers and strategists at major investment firms from December 3-13.
The findings are in line with the latest Bank of America Corp. survey of global fund managers, which showed that hardline central banks are seen as the biggest tail risk for the first time since May 2018, followed by inflation. and the resurgence of Covid-19. Investors are bracing for major policy meetings from the Federal Reserve, the European Central Bank and the Bank of England this week, which could provide clarity on the pace of monetary tightening and the demise of stimulus measures.
Here’s a summary of the main findings from the Bloomberg News survey:
Most of those polled said that rising inflation or aggressive measures by central banks to curb rising prices are the biggest dangers for the year ahead.
“One of the biggest risks would be an excessive tightening of monetary conditions,” said Julien Lafargue, chief market strategist at Barclays Private Bank. “While the conditions have been met for the emergency measures to be removed, it will be a challenge for the US and the world economy to tolerate excessive increases in interest rates, especially from the Fed.”
Concerns about monetary tightening overshadow other risks, including a possible new outbreak of the pandemic, a slowdown in China or geopolitics. Still, this does not mean that they are off the radar. “Unfortunately, Covid will exist, in one form or another, for the foreseeable future,” said Marcus Morris-Eyton, portfolio manager at Allianz Global Investors, which oversees about $ 730 billion in assets. “But more importantly, we are getting better at managing both personal and financial consequences.”
For some, the general exuberance in the market itself is dangerous. “We are actually in as big a bubble as any I have ever experienced – the cynicism is gone,” said Alasdair McKinnon, a senior manager at the Scottish Investment Trust, which oversees about $ 890 billion in assets. “The most extreme signs of speculation are in cryptocurrencies, SPACs and the general rush towards IPO companies.”
Despite the agreement that inflation is a risk, it is more difficult to pinpoint the level at which it becomes a danger to the stock market. For most of those surveyed in the Bloomberg survey, the problem begins when annual growth in US consumer prices remains above 3%. Still, nearly a fifth said they won’t derail stocks until inflation stays above 5%.
For Salvatore Bruno, chief investment officer at Generali Investments Partners, the breaking point is US annual inflation that persistently remains above 4%. The reaction of the bond market may be more important. Many strategists hope that interest rates will not keep up with increases in consumer prices, which means that real yields on inflation-adjusted bonds will remain too low to make them a viable alternative to stocks.
“We believe that actual rates are the crucial metric to monitor to understand how markets could go off the rails,” said Bruno, whose firm oversees about $ 650 billion.
Pascal Blanque, chief investment officer at Amundi, Europe’s largest pure asset manager with around $ 2 trillion under management, agrees: “As long as central banks cap nominal rates and real rates remain so low, there is no alternative to actions. ”
Inflation on both sides of the Atlantic is running at much higher levels than respondents said should cause alarm. While the Federal Reserve and the European Central Bank ignored the readings during the post-pandemic rally, that won’t last much longer and “will barely tolerate inflation above 4% -4.5% in 2022,” according to Blanque.
Risks to the upside
Of course, investors are also positioning themselves for surprises to the upside. Chief among them is an economy that proves to be more resilient than current consensus expectations.
“There is still room for a positive growth surprise given that households in developed markets have large stacks of savings that may deplete more quickly, while supply shortages could diminish more quickly than is believed,” said Hussain Mehdi, macro and investment strategist at HSBC Asset. Management, which oversees about $ 620 billion. “A strong recovery in the labor market also supports the outlook for consumption, while overall policy frameworks remain largely accommodative despite a shift toward normalization.”
The continued strong economic recovery is the basis for Goldman Sachs Asset Management’s positive view of the equities. “We believe we will still have a strong growth backdrop next year,” Luke Barrs, head of core EMEA client portfolio management for GSAM, said by phone. “And while we are aware that inflation and interest rates could start to rise in the course of 2022, we do not see that negatively hamper equity markets in the grand scheme of things, as long as growth dynamics hold. solid “.
For 24% of those surveyed, temporary inflation would be the most important positive surprise, although some said it would depend on the reasons. “Falling inflation rates can also have ‘negative’ reasons, that is, a slowdown in growth,” said Stefan Kreuzkamp, chief investment officer at DWS, which oversees about $ 990 billion.
So where are they investing next year?
According to the survey results, the time has finally come to look for cheaper and more valuable stocks, with 24% saying they are their best option for 2022. Respondents in Europe also pointed to opportunities in small-cap companies , while César Pérez Ruiz, director of the investment officer at Pictet Wealth Management, which oversees some $ 275 billion, said his bet is on companies with pricing power that can weather inflation in all sectors.
For Nieves Benito, director of fundamental research at Santander Asset Management, which oversees around $ 220 billion, “volatility is likely to remain high and therefore the main issue would be a market for stock pickers, where stocks valuation disparities increase as markets embrace it. ” plenty of time to anticipate improving fundamentals. ”
George Lagarias, Chief Economist at Mazars Wealth Management, highlighted the transition to a more sustainable, low-carbon economy. “It is no exaggeration to say that the enormous amount of money that is institutionally going to ESG, not to mention the wall of regulations, is enough to make most other investment issues peripheral to the sustainability giant,” he said.
Regarding geographic selections, respondents tended to favor the region they are in: Europeans are overwhelmingly overweight in European stocks, while US investors are more confident in US stocks and responses from Asia are less. pessimistic about China.
For Kevin Thozet, a member of Carmignac’s investment committee, which oversees some $ 46 billion, “the area where valuations seem most attractive” is emerging markets. “China’s potential to change its policy mix while waiting for the United States to tighten both its monetary and fiscal policy should provide a supportive backdrop for Chinese stocks,” he said.
© 2021 Bloomberg