The immediate future: our Herd of fund managers forecast 2022.
Take-Aways- 2022 predictions:
Phil Smeaton (VAM/Sanlam) : Boris Johnson to be ousted and the GOP control both the Senate and House of Representatives, crippling Biden.
Daniel Jolliffe (Quilter Cheviot)- Rising interest rates will prompt a return to favour of companies who benefit from higher rates- i.e., financials.
Lorenzo La Posta (Momentum)- Includes Private Equity in a diversified portfolio as increasingly more companies stay private for longer.
Omicron: Sweeps through the population but herd immunity by end 2022 (reducing vaccines)- Smeaton/Sanlam.
Lockdowns: a worry and would drive inflation up- but with the efficacy of vaccines- unlikely- Jolliffe/QC.
UK equities: a strong pick as Brexit dissipates and a post pandemic world emerges- La Posta/Momentum.
How to make more money than everyone else in 2022?
The immediate future: our Herd of fund managers forecast 2022.
According to Harry Markowitz, the so-called father of Modern Portfolio thinking and co-winner of the 1990 Nobel Prize for Economics, the answer for making the most money in the time from now until the end of December 2022 is really very simple. We need to put all our money into the asset which goes up the most. This would be very efficient. However, Markowitz then wanders off into what to do if you don’t know which asset that is leaving us with a Niels Bohr thought “it’s very hard to predict especially the future”.
Markowitz’s wandering took him into diversification and mixing different assets. In one interview he acknowledges Shakespeare’s Antonio (Merchant of Venice) beating him to it:– when asked how his business was doing Antonio replies “ I thank my fortune for it, my ventures are not in one bottom trusted, nor to one place; nor is my whole state upon the fortune of this present year; therefore, my merchandise makes me not sad”. For Markowitz, diversification is the answer to managing the future and for our Herd of multi-asset fund managers, their most common refrain is that diversification is “the only free lunch” in investment.
BULL MARKETS- WHO NEEDS A FREE LUNCH?
The need for diversification and a “free lunch” dissipates when your investment is riding a bull market. A bull market can be defined as one in which any idiot can make money from. The S&P 500 in recent years has not only absorbed the COVID wobble but surpassed the expectations of the many with another plus 25% return for 2021 (following +16% in 2020). For those passively invested in the S&P always going up, it might be time to consider the free lunch. Why?
In our November Newsletter we detailed Deutsche Bank research covering market sentiment on perceived risks ahead. Fears are led by inflation and the worry that Central Banks can’t control it. For the layman, we have just been through a year in which purchasing power from your savings (in USD) has dwindled from halving over 24 years (3% p.a. early 2021) to halving over 10 years (7% p.a. current rate.). To “feel” the effect on your pocket it might be worth noting that between 2011 to 2020 the S&P 500 has averaged +13.95% p.a. over 10 years and 11.95% when adjusted for inflation. The fear is that the big “silent killer” (inflation) is joined by the noisier COVID killer as the press absorb the consequences of variations in the Greek alphabet which maybe bypass vaccines or challenge vaccine efficacy. In short, there are killers out there to S&P enthusiasm to the extent where more investors might consider the free lunch diversification route for 2022. Maybe?
2022- PREDICTIONS AND FORECASTS- NO MORE BULL?
Our text above is drafted to reflect some serious (but real) headwinds to continued equity growth. TINA (There Is No Alternative- to equities) may not have it all her own way. So, what can we predict? For this we turn to our Herd of multi-asset experts for a view on the year ahead.
PHIL SMEATON- VAM/SANLAM
W start with Phil Smeaton of VAM/Sanlam because he has an outlandish streak to him. He sent his views on 17th December to include the prediction that “ Boris Johnson is ousted from government and is succeeded by a more floppy-haired Rishi Sunak as PM.” I wasn’t going to print this but in the intervening 9 days UK news channels are suggesting something similar. This may be something for our Newsletter predictions to gloat about in Dec 2022. Sticking with Smeaton and politics- and reflecting the increasing connection between markets and politics, he predicts that “The Democrats lose control of both the Senate and the House of Representatives in the mid-term elections, reducing the ability of the Biden administration to push through his political agenda” which would of course impact markets to the extent that an emasculated leadership can’t lead.
Smeaton’s less political predictions include:
The Federal Reserve announces 2 rate hikes in 2022 followed by a rate cut in an about-turn.
The rate of inflation starts to fall but then it picks up towards the end of 2022.
Omicron sweeps through the population and herd immunity is reached in the second half of the year, reducing the need for vaccine interventions.
DANIEL JOLIFFE- QUILTERS CHEVIOT
For Daniel Jolliffe, he believes that we may be through the worst effects of COVID in economic terms believing that “ GDP growth will continue to normalise. This isn’t an indication that economies are stalling but more an indication that most global economies have either got back or are close to getting back to pre-pandemic levels of output. “. This provides a background to a cautious but positive view on the management of inflation and interests rates.
On global inflation: “ Global inflation will begin to decline but will settle at a level that is significantly above the 2% target level of central banks. A caveat to this is that, if future lockdowns occur, we could see pent- up demand drive inflation higher again for a period time once lockdowns finish. Given the efficiency of the vaccine/booster roll out, I would hope that this is unlikely. “
On interest rates: “ Interest rate rises will continue in 2022. It has been highlighted that the BOE could raise rates up to 1% by the end of 2022. If the FED and ECB follow suit, we could witness a return to favour of companies that stand to benefit from higher interest rates, such as financials. Interestingly, since the 26th of November (when financial markets began to react to the Omicron outbreak), UK equities have outperformed US equity markets considerably”… see below.
LORENZO LA POSTA MOMENTUM ASSET MANAGEMENT
For help in putting together a specific menu for our “free lunch” we turn to Lorenzo at Momentum for his top 5 assets for 2022:
Japanese equities. Valuations have been cheap for a while, coupled with improving fundamentals, lower inflationary risks and growing focus on shareholder returns.
UK equities. Like with Japan, valuations have been cheap for a few years now and you can pick some good quality names for the long run, as Brexit risk dissipates, and the economy stabilises in a post-pandemic world (when it comes).
Chinese government bonds and equities. Many see the country as “uninvestable”, we see it as an opportunity to get diversification, resilience and high yield (from a bond perspective) and a large universe where expert active managers can pick hidden gems and outstanding businesses (within equities).
Asia convertible bonds. We love asymmetries, especially when capturing the upside with lower downside risk.
Private equity. Increasingly more companies decide to stay private for longer, with private markets offering today compelling opportunities.
And with that, we leave you with our very best wishes for your health and wealth in 2022.
END.
For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC, please contact us at
+971 56 2228 535