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Potential challenges to market gains for investors in 2022

‘There are still gains to be made, but they’re going to be harder to come by’

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Investors and their financial advisors looking at the outlook for 2022 should expect growth, but also prepare for the unexpected, say experts who look at the big picture.

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“We’re getting into the middle stage of the economic cycle,” says Brian Madden, senior vice-president and portfolio manager at Goodreid Investment Counsel in Toronto.

“There are still gains to be made, but they’re going to be harder to come by, and many of the winners and the losers from this current cycle have already emerged,” says Madden, whose boutique firm provides wealth management services to high-net-worth clients.

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While the economy is likely to continue to grow at least in the short term, expectations are that it will be buffeted by squalls coming in from all angles.

These influences may include everything from the still-present pandemic and its variant viruses, to the spectre of inflation, higher interest rates, labour shortages and higher labour costs, supply chain woes and political tensions that flare up between superpowers and in trouble spots.

On December 8, the Bank of Canada maintained its key overnight lending rate at 0.25 per cent and said it will likely maintain this rate until at least the middle of 2022.

“The global economy continues to recover from the effects of the COVID-19 pandemic,” the Bank said. Canada’s economy grew by about 5.5 per cent in the third quarter, but gross domestic product is still below the last quarter of 2019, before the pandemic. Inflation is a big concern, though the Bank says it expects inflation to ease back toward an acceptable 2 per cent year-over-year after the middle of the new year.

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Looking at current conditions, Madden says he is looking toward companies that are price makers — those that have some control over the value of their goods and services because of how they manufacture or their access to raw materials. These companies will likely fare better than price takers, who have to pay whatever it takes to keep business going.

“We’re looking at owning companies that can deploy technology and capital for their production, as opposed to labour, which is increasingly expensive,” he says.

Upward wage demands and a tight market contribute to inflation and also expenses for many businesses, but one of the side effects is that more people have more money to spend. This can affect decisions on which some sectors will do better than others, Madden says.

“We’re thinking that this means this recovery is going to be more inclusive than the gains we saw posted toward the end of last year [after the economy crashed at the beginning of the pandemic]. We’re looking at opportunities to invest in companies whose products and services cater to the mass market more than just to the affluent or the 1 per cent,” he says.

Assuming there are not sudden shocks to the economy that send indicators scurrying in all directions, growth will continue, says William Yun, executive vice-president and investment strategist at Franklin Templeton Investment Solutions.

“We think the environment is still attractive for risk assets [equities],” he said, speaking at Franklin Templeton’s 2022 Global Investment Outlook presentation in December.

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“Earnings will continue to be attractive, though they’ll come into more of a steady state after the strong rebound we saw earlier this year. Into 2022 we think you’ll see growth rates in the high single digits,” Yun said.

“That’s attractive when you look at real returns. Fixed income yields are still pretty negative, so equities are an attractive asset class over the near term,” he added.

“Consumers are in a strong position — in the United States and other parts of the world there’s more than $1 trillion in savings. And on the corporate and manufacturing side, there will be more capex [capital expenditures] as companies replenish their inventories.”

The commercial real estate outlook for 2022 is good, too, according to a just-released report by Colliers Global Capital Markets, The 2022 Global Investor Outlook.
The U.S. is expected to post a record year for volumes in 2021, even without major coastal markets fully recovering, and 2022 could be even stronger, according to David Amsterdam, president, Colliers U.S. Capital Markets and Northeast Region. And in Canada, low interest rates and private investment continue to drive the market.
For equities, investors might want to look at markets beyond the United States in the coming year, says Wayne Kozun, chief investment officer at Forthlane Partners in Toronto.

“Certainly the U.S. has outperformed other markets in the last year, but it’s rather expensive. Other parts of the world, such as Europe or emerging markets, are less expensive so you might want to consider them,” he says.

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High-net-worth investors should also look to private equity in 2022, Kozun adds. “You’re less likely to see double digits in public markets but there may be opportunities in the private markets,” he says.

Companies with strong ESG — environmental, social and governance policies — will be increasingly strong bets for investors, Kozun says. “Issues like social reconciliation [diversity and equity, and so on] and companies that deploy renewable energy are important,” he says.

“The issue is to avoid good ESG companies that have already been picked over by other investors and become super-expensive,” he says. “That has happened to some of the electric vehicle companies, for example.”

ESG has become increasingly important not just because it’s good for society, but also because investors are demanding better practices, Alex Edmans, finance professor at London Business School told the Franklin Templeton Global Investment Outlook audience.

“It’s an important social responsibility, but I view it also as about growing the pie,” said Prof. Edmans, who presented examples of how ESG is good for the bottom line.

“It’s not as much about risk management now as it is about creating greater profits,” he said.

“This year our focus is on sustainable investment,” says Duane Green, Franklin Templeton’s president and chief executive officer.

“It’s a way of managing money, not a trend.”

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