There’s plenty of opportunity for returns in both equities and fixed income, as long as investors are patient, disciplined and willing to accept that old rules of thumb don’t really apply right now—as shift-upon-shift has upended the investment environment, and there are some more shifts yet to come.
“The pandemic is fast approaching two years, and the markets have navigated their way through with some volatility,” said William Davies, deputy global chief investment officer at Columbia Threadneedle, as he kicked off a webinar on the firm’s outlook for next year. “But when investing in markets, it’s not just about what’s happening now; it’s looking to what’s happening in 2022, 2023 and after.”
To a great degree, the story of 2021 was written with impressive growth in some industries but devastation in others. Davies said the ongoing challenges are supply chains, inflation, regional increases in Covid-19 rates, as well as the reduction or removal of economic stimulus. But for next year, one of the largest influences on economies everywhere will be rising interest rates.
“The direction of rate movement is up. The backdrop of low interest rates is changing, and it will affect markets as we go through the year,” he said. “And there’s one last factor to consider, and that’s if we look around the world, the level of M&A activity is very high. That’s because companies are taking advantage of the cheap cost of credit to take over other companies. We expect that to continue.”
According to Melda Mergen, global head of equities at Columbia Threadneedle, the pandemic’s peak might have passed, but it’s still going to be part of the investment story of 2022.
“There was a recession, but not a typical recession. You can think of it more like a natural disaster in terms of recovery. There was a very quick reversal, but consumers changed their consumptions,” she said. “Now we’re consuming more goods than services.”
Because so many investors are concerned about equities, Mergen said she’s sticking to a discipline of looking at “every market, every stock, on its own merits.”
“Earnings is the most important factor as to whether a valuation is justified or not,” she said. “We look for top-line growth to be healthy. Margin growth is important, but there are a lot of levers you can pull to affect margins.”
In general, Mergen said she’s feeling positive about equities next year, keeping in mind some basic principles specific to this environment. For example, while growth stocks look much more expensive than value, most of the growth companies are benefiting from the current trend of bolstering every area of a company with technology. “They’re now all looking for data to better connect with the customer,” she said, so there may be more room to grow.
“Small-cap stocks are still fairly cheap, and they definitely deserve allocation in the portfolio,” she continued. “But their sales growth can be unpredictable, so choose for that basket carefully.”