The coronavirus continues to introduce uncertainty, but investors should expect cyclicals to outperform in the first half of the year. Here we identify key catalysts for equity markets.
The strengthening case for alternative investments
When it comes to diversification, investors have lifted their allocations to alternative asset classes, even at a time when public markets have been performing very strongly. The logic of diversifying into infrastructure, private credit and private equity remains strong because they add stability to portfolio returns. They are especially relevant for longer-term portfolios such as defined contribution schemes – as the thinking matures around how these pension schemes approach risk, so allocations to alternative assets are likely to rise. Indeed, the Netherlands’ introduction of collective defined contribution schemes is likely to favour higher allocations to risk assets and more illiquid investments, not least to private markets.
Going ‘green’: from exclusion to ESG
Investors are quickly shifting their approach from primarily excluding assets that are not green to actively investing in businesses that will have a long-term positive impact on the environment, for instance through better use of plastics or developing green hydrogen as a source of power. For investors such as insurers, ESG (environmental, social and governance) is becoming a portfolio’s fourth pillar alongside risk, return and capital. This influences how you select the building blocks of portfolios, and we have been doing a lot of research into what we call “green capital market assumptions”.
The outlook for inflation and interest rates will be very important in 2022. What will they mean for the role that fixed income plays in portfolios? This is a question every investor must ask. There are also implications for alternative assets and currencies. Despite their disappointing performance, alternatives will have an increasingly important role as stabilisers in long-term portfolios. With currencies, high inflation – whether transitory or not – means investors must be clear about what exposure they have and why. Finally, 2022 will be a year when ESG impacts become a key dimension of portfolios for many investors, alongside risk and return.