Investment highlights: sustainability reigned in 2021 and will reign in 2022
One, if not the most important dynamic this year has been the further integration of environmental, social and governance (ESG) criteria into investment processes.
We’ve seen a number of asset managers commit to reaching the goal of net zero by 2050 at the latest. The complete reduction in carbon emissions will occur at both the company and portfolio level. This trend is expected to continue in 2022 and we will see new asset managers commit to this goal.
The transition to a more sustainable economy presents both opportunities and risks. Adopting a zero net policy presents both opportunities and risks, as it also redefines the investment framework. It’s something Money Marketing explored in depth in its August 2021 cover story.
As investors appear increasingly willing to include ESG measures in their portfolios, asset managers will continue to launch new sustainable funds.
After years of political turmoil following the Brexit referendum followed by the outbreak of the Covid-19, some consider that the British market is well positioned to benefit from the reopening of the economy.
This thanks to a rapid vaccination campaign, an early and gradual reopening of the economy and relative political stabilization.
Small and mid caps benefited from these economic conditions, with UK small cap funds performing well in the third quarter of 2021.
As the recovery continues, investors might want to consider value stocks. Based on analysis of previous recoveries from global recessions, Morningstar Investment Management found that stock is significantly outperforming growth.
Still, the new Omicron strain could be the troublemaker rocking the boat. So far, it appears that the market considers this new variant of Covid to be a slight threat. Time will tell us.
There has also been a lot of talk around active and passive investing, with more and more portfolios tilting towards the passive. The argument is that active management is expensive and not always profitable.
There is no doubt that this debate will continue in 2022.
The place of bonds in the portfolio has also been called into question. The debate over the sustainability of the 60/40 portfolio has been going on for years, but growing inflation has certainly intensified the conversations.
Some even see 100% equity portfolios as the way to go, others see the 60/40 model just in need of tweaking.
In October 2021, the UK also became the first country in the world to launch sovereign green bonds.
Yet with a fixed annual rate of 0.65% over a three-year term, UK Green Bonds have not generated much enthusiasm.
Will the rush to finance green projects outweigh the modest returns in the minds of investors?
In any case, other countries are also considering launching their own sovereign green bonds. Maybe they will offer higher fixed annual rates?
China was the center of attention in the second half of 2021 with regulatory crackdowns and the Evergrande default.
In general, the industry was not too worried about these disruptions and considers that China is adjusting its regulatory framework to its new needs.
India also had a very good year, providing high returns for investors.
Rapid digitization, a young and abundant workforce, low production costs, and a government keen to support private businesses will support this trend in 2022 and years to come.
Some industry players suggest India is at the start of a business cycle that will mirror the one China experienced from the 1990s until today.
Despite a bad year, Japan could be an interesting place for investors in 2022.
Japan is behind the United States and Europe in its recovery and still has a lot of catching up to do.
Japanese equity valuations are also attractive relative to their developed market counterparts, and Japanese companies are taking steps to improve profitability in response to the outbreak of the pandemic.
In addition, Japan does not have the propensity to be an inflationary economy. The Bank of Japan is unlikely to raise interest rates.
Therefore, Japan will be particularly attractive if other major central banks raise interest rates and tighten monetary conditions.
It was also a very good year for venture capital trusts (VCTs), which are on track to break their own record of funds raised in a single tax year.
Some suggest that alternative assets such as VCTs and Enterprise Investment Schemes are no longer seen only as tax-efficient vehicles, but also as investment products in their own right.