As we head into 2022, Mattioli Woods’ Asset Management team are delighted to share five of our current ideas which we feel will stand investors in good stead, not just for this year, but potentially longer-term too.
Commercial property – the income will look good despite rising interest rates and with the prospect of inflation being sticky, looks positive
Mattioli Woods’ Responsible Equity Fund – With growing interest from companies and investors around the United Nations Sustainable Development Goals, the fund has real momentum behind it and offers a blend of direct equity and broader funds.
UK smaller companies – yes, the larger companies drove a good year for UK equities in 2021, but the real potential remains lower down the cap scale
Gold – negative real yields likely to remain throughout the year, which has historically benefitted the gold price. We believe that this relationship could persist in 2022.
Healthcare – while it might seem obvious, this is a post-pandemic play, a long-term theme, and one we believe has plenty to play for.
The UK commercial property market is full of opportunities and challenges for investors to navigate with both a short and long term horizon. The industrials and logistics sector was the darling of the last calendar year and the supply and demand dynamics for this sector remain very supportive for both development pipelines and the potential for rental growth. The future of the office has been a significant debate since the onset of the pandemic, which enforced home working for most employers and employees. While we see agile working practices remaining in place (predominantly at the behest of employees), there are clear rewards from the communal nature of a physical office driving collaboration, discussion and development. The evolution of the office is just starting.
While the accelerated switch to online shopping has benefited the logistics sector, it has cast further shadows over much of the retail sector. It is important that we avoid the simplistic narrative that “all retail is bad” as the dynamics differ by sub-sector. The resilience of food stores through the pandemic has been followed by a strong recovery in retail warehousing which dovetails nicely with the hybrid retail model.
However, there are continued challenges for other retail subsectors, such as the High Street, which will require time, reduction, reform and redefining before a sustained recovery is seen. Looking at the shorter term, while it might initially be perceived as a challenge for investors, we see the ending of the moratorium on forfeiture for landlords at the end of March 2022 as an opportunity to either build more collaborative relationships with tenants or look to strengthen the tenant profile through replacement. Overall, the focus in 2022 will rightly return to the income generated by property with a good spread above rising interest rates and the potential for inflation linked growth in certain subsectors. Across the property asset class as a whole, we expect 2022 to be a year where the rental income provides the majority of the total return with modest capital appreciation.
We believe that our Responsible Equity Fund is well positioned for 2022. The outlook for risk assets remains broadly favourable, with strong corporate earnings eclipsing the potential risk of Covid-19 variants, for now. While we do expect equity returns to be more muted than last year, we believe there are some great opportunities on the horizon as the need for a more sustainable economy takes centre stage. As we appear to be entering a mid-cycle period, we expect greater dispersion in performance across sectors and regions, as reflected in comments elsewhere. The Responsible Equity Fund offers exposure to secular growth trends we view as having long term drivers of demand, such as sustainability and digitisation.
Given the current macroeconomic backdrop, the Fund has exposure to firms that may thrive in a more inflationary environment; companies with strong pricing power, mission critical products and barriers to entry that allow them to increase prices in line with inflation, such as Microsoft. Unlike many other funds in the space, the Responsible Equity Fund seeks to blend the ideas of ‘values’ and ‘value’. From the perspective of ‘values’, the Fund invests in companies that have robust environmental, social and governance (ESG) practices, or at least those with a demonstrable path for material improvement. Looking at ‘value’, the Responsible Equity Fund aims to ensure that the valuations paid for investments are at sensible levels, which is vital to generating attractive long-term returns. Everything the managers buy must meet at least one of the UN’s 17 Sustainable Development Goals (SDGs); this is a Fund with positive criteria, seeking attractive long-term returns, while ensuring that the companies we own are behaving in the interests of their communities and wider society.
Despite the twin fears of Brexit and Covid-19, the UK investor, via listed equities, received what most would consider a more than satisfactory investment return last year; nevertheless, many valuations still remain cheap compared to other international markets. In an ever-globalised space, it is perhaps a little surprising to see such a large discount to peers, mainly due to the lack of a domestic technology sector in a technology obsessed world and lingering uncertainties about Brexit.
We fully expect some choppy waters in 2022 - while forecast GDP growth is strong (if we avoid new dangerous Covid-19 variants leading to lockdowns and consumer inertia) there are issues bubbling under which could provide headwinds for UK corporates. Inflation fears have concerned the Bank of England enough to tighten interest rates in December. This is being driven by a combination of raw materials increases, supply chain issues and wage inflation, and opinions differ as to how transitory this will prove in 2022. There are also National Insurance hikes and rising energy bills which are going to mean the consumer starts to feel the pinch.
Taking the positives, strong companies will be able to mitigate the impact by passing on cost increases while weaker companies may see profit margins squeezed. However, robust GDP growth should provide impetus for domestic earnings (and dividends) and if the market does not re-rate, then expect to see another very buoyant year for merger and acquisition activity. Low borrowing costs, low valuations and a soggy currency mean that many companies look highly attractive to hungry predators, both industrial and private equity. This should provide a more than satisfactory backdrop for investors in UK smaller companies, where innovation remains and where many underestimate the potential already within the listed space.
With the global economy laden with debt and still in the midst of a pandemic, central banks face something of a tightrope walk as they seek to tackle rampant inflation. Tighten monetary policy too aggressively and the implications for companies and consumers could be grave, with interest costs spiralling. Fail to take enough action and inflation could persist at high levels, again with significant consequences. We believe the most likely approach by central banks is to allow economies to run hotter than usual; that is to say, that the typical low single digit inflation targets become redundant for now.
This could lead to persistent negative real yields, where inflation rates are higher than interest rates. One asset that has a track record of performing well in such circumstances is gold. As an asset that provides no cash flows, gold is relatively more attractive in inflationary environments, when assets such as bonds see the values of their coupons falling in real terms. Gold is also seen as a safe-haven asset and has historically performed well in periods of market stress. With the fine line that central bankers face, we feel the potential for policy error and higher levels of market volatility provide yet another reason to own gold in 2022.
The healthcare sector continues to look attractive on a long-term basis, with strong fundamentals and structural tailwinds. Expenditure on healthcare for individuals and governments is often non-discretionary, giving the sector defensive characteristics which prove useful when constructing portfolios. Given the additional strain on healthcare services presented by Covid-19, one could be forgiven for thinking that 2021 was a strong year for the sector. In fact, performance was lacklustre, with many in the sector hampered by delays to elective surgeries, as a result of the pandemic. We expect to see these concerns dissipate as we enter 2022 and investor sentiment to become brighter within the space; especially since President Biden’s Build Back Better Act looks more positive for pharma and biotech companies than originally feared, with all significant policy changes around drug price legislation currently dropped from the bill.
We continue to see the use of technology revolutionising the healthcare sector, for example, the use of telemedicine allowing doctors to monitor patients remotely, via video or phone appointments, has accelerated during the pandemic. There remains plenty of opportunity for research and development in the space and with valuations looking attractive, we believe now could be an excellent time to invest, for the long-term.
This document has been produced for information purposes only. It is not intended to be an invitation to buy or act upon the comments made. All investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances and one must satisfy certain investor criteria before being considered eligible to invest. Any forward-looking statements and forecasted returns represent the current views of Mattioli Woods plc and may be subject to change. Your capital may be at risk and past performance is not a guide to future returns.
Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.