We spoke to some of the top portfolio managers and economists in Australia to get their take on what’s in store for the next 12 months; the outlook, the challenges and, most importantly, the opportunities.
Hamish Tadgell, portfolio manager, SG Hiscock & Company
In your opinion, what does the Australian share market look like in 2022?
The starting point is whether we will still be living with the virus. Higher levels of vaccination should lead to reopening and greater mobility, but there’s still significant uncertainty on how quickly international borders will reopen and the lasting impact this will have on confidence and behaviour.
For now, policy remains extremely accommodative and the business cycle looks like it is still in expansion mode. However, growth momentum has peaked and policy-makers are looking to wind back emergency measures.
As we progress through 2022 we expect financial conditions to tighten. The Federal Reserve and the RBA have confirmed they are set to taper. This has the potential to create a headwind for equity valuations, and paves the way for potentially higher volatility. This requires an active approach to managing risk and capitalising on managing opportunities as they emerge.
What sectors and companies will do well in the next 12 months and why?
On reopening we expect a bounce on strong pent up demand. This should favour service-based sectors and more ‘out and about’ exposed companies including travel and leisure, traditional retail and those impacted more by lockdown restrictions and lower activity levels. Corporate Travel, Aristocrat and Cleanaway are companies that should benefit.
Energy stocks should also benefit as activity recovers. We have already seen energy prices surge before global borders have reopened. This theme has further to play out, and depressed valuations provide an opportunity for significant upside.
Structural growth stories that have benefited from - and emerged stronger - from the pandemic should also continue to prosper. We view fibre telecommunication networks as critical social infrastructure and utility-type assets like toll roads, airports and power transmission. COVID has seen a step change in the demand for higher-speed internet and fibre connectivity. We see this as a structural shift in demand that should continue to benefit the likes of Uniti Group and Chorus.
What are the main volatility risks on the horizon?
In terms of risks, tapering and policy tightening is front and centre, with the potential to create a headwind for equity valuations. Growth peaking, inflation, a slowdown in China, the virus mutating and vaccine effectiveness are other market risks one can debate.
Confidence and market psychology is the other key risk. Too much liquidity chasing too few goods has, in some respects, been the punchline of the last 12 months, and greed, optimism, risk aversion, FOMO, TINA are all on display. There are also growing signs of speculation and late cycle behaviours including pockets of extreme valuation. We don’t see it at euphoric proportions, but some red lights are flashing and it warrants a higher degree of caution and consideration.
What are the biggest opportunities for companies in the next 12 months?
For all the tapering talk, one of the biggest events of 2022 may be the shape of US government fiscal stimulus. COVID has seen a radical pivot to fiscal policy and the upcoming US bipartisan infrastructure policy plus ‘build back better’ package could see up to US$4.5 trillion of new spending - that’s 20 per cent of GDP and double the size of previous record stimulus! This could boost consumption and stimulate growth across a host of sectors, but also raise the debate and risk around inflation.
Andrew Zenonos, portfolio manager, Russell Investments
In your opinion, what does the Australian share market look like in 2022?
We think that the outlook for the equity market on a whole looks constructive, given the backdrop of strong economic growth as Australia reopens and very supportive fiscal and monetary support. Corporate earnings are likely to be very solid, led by those companies most exposed to the services sector. We think Australian equity valuations look attractive relative to other developed regions – and this could provide an supportive backdrop for foreign investors, in addition to the higher dividend yields on offer.
What sectors and companies will well in the next 12 months and why?
We expect cyclical companies with exposure to improving growth across the economy to outperform, as well as companies that benefit from higher interest rates. Consumer stocks exposed to reopening such as leisure and travel stocks should benefit from ‘pent up demand’. Financials should benefit from a stronger economy and gradual increase in bond yields, across both banks and insurance. Notwithstanding the expectation of heightened volatility, we are positive on the outlook for commodity stocks, where spot prices should continue support robust earnings and free cash flow generation. We expect defensive stocks, including those that have benefitted from lockdowns and the ‘stay-at-home’ theme such as supermarkets, to underperform.
What are the main volatility risks on the horizon?
There are three key risks on the horizon. The first is reverberations from the slowing Chinese property market. We don’t think this is a financial contagion risk, but it does create a drag on the Chinese economy. The second is the upcoming federal election – we are still yet to get detailed policy plans from either party, but current polling suggests it is going to be a close race. The third is inflation and central bank policy. Our view is that inflation is not going to force central banks to raise interest rates through 2022 – but that is something that we continue to monitor.
What are the biggest opportunities for companies in the next 12 months?
The experience of the last 12 months has driven a fundamental change in the way many companies do business. As the economy reopens and we get back to ‘normal’, it is likely that companies will need to continue to adapt to life after, or indeed life with COVID. Companies that can evolve their business models to capitalise on this paradigm shift will be rewarded, as we have seen in certain parts of the market over the past 18 months. We also expect increased corporate activity to continue. The backdrop of monetary and fiscal stimulus alongside continued low interest rates should spur companies to be acquisitive in order to solidify competitive advantages and evolve the way they do business. Capital management by companies via dividends and share buybacks was a notable theme during reporting season, and as the economy continues to recover, we expect this to continue to benefit shareholders over the coming 12 months.
David Bassanese, chief economist, BetaShares
In your opinion, what does the Australian share market look like in 2022?
The Australian share market should still produce positive returns over the coming year though the pace of gains is likely to slow as the V-shaped post-COVID rebound in corporate earnings tapers off somewhat. Another headwind for the market is likely to be gradually rising bond yields as central banks ease back on the degree of extreme monetary support they provided during the COVID crisis.
What sectors and companies will well in the next 12 months and why?
Hopefully, next year we will no longer face the risk of lockdowns, meaning those sectors and companies that were especially disrupted by COVID are well poised to recover more fully. This includes travel, infrastructure, and consumer service orientated companies. Among the major sectors, banks are likely do well though their period of outperformance is likely behind us as credit growth slows, while mining companies could also be challenged by the downturn in commodity prices.
What are the main volatility risks on the horizon?
Key risks remain COVID and interest rates. What we don’t want to see are new variants of COVID emerge that have greater immunity to current vaccines – as that would raise the risk of a return to lockdowns around the world. On the other hand, if the global economy recovers from COVID, markets will need to negotiate a likely lift in bond yields, which could place downward pressure on equity valuations. We also face another federal election next year, which could produce a period of investor and consumer uncertainty – especially if it results in a hung parliament.
What is the biggest opportunities for companies in the next 12 months?
The best opportunities seem among the smaller and mid-cap stocks, and in our vibrant technology sector. A weaker Australian dollar will also favour companies with large offshore earnings, such as our leading health care companies.
Neil Griffiths
Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.
Neil is also the host of the ifa show podcast.
