Global equities: where the risks and opportunities are in 2022

The key question for 2022 is whether the US Fed can keep inflation under control without short-circuiting the business cycle, says Pendal’s head of global equities ASHLEY PITTARD

• Investors head into 2022 with unusual macro settings
• Risk is tech stocks underperform, dragging down the market
• Opportunity for mid and small caps to outperform

GLOBAL equities investors enter 2022 with very unusual macro-economic settings in place – high inflation and low bond yields.

It’s Covid-related — as is the recent rotation back to perceived safer assets such as US tech stocks.

The rotation is contributing to one of the biggest risks to global equities in the coming year — mega caps underperforming and markets going backwards with increased volatility, says Pendal’s head of global equities, Ashley Pittard.

“The past year has been a tale of two halves,” says Pittard.

“The Delta variant of Covid-19 hit mid-year and delayed the recovery and the re-opening story. The market rotated back to safe havens.

“For example, five of the top stocks in the Nasdaq 100 – Microsoft, Apple, Alphabet, Tesla and NVIDIA – contributed 72 per cent of the total NASDAQ return.

“There’s lofty valuations in equities and a narrowness of the market because of the tech companies.

“There has been a massive initial public offering frenzy, there’s inflation that is now more than transitory and the US Federal Reserve is withdrawing stimulus.”

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Inflation is critical. Pittard argues it’s more than transitory because wage increases are now being embedded into economies, and the cost of housing – be that home prices or rents – are set to rise. Higher inflation will impact company profit margins and earnings.

“So the big risk for 2022 is muted or negative returns for global indices and increased volatility,” he says.

Opportunity in 2022

Opportunity in 2022 depends heavily on the US Federal Reserve, Pittard says.

“Can the US Fed keep inflation under control without short-circuiting the business cycle? That’s the key question.

“If earnings growth can broaden outside tech companies — and capital spending increases outside really large caps and the top five NASDAQ stocks — markets will do very, very well.

“We have already seen some fragility in the earnings growth of the ultra-large tech companies.

“But if we see broad-based capital spending and earnings growth, the mid and small caps will do well.

“The banks will do well. Businesses that have pricing power will do well and emerging markets will do well.”

About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

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