- "It’s worth noting that it only took about a year and a half for U.S. companies to recover their earnings level from the slippage of 2020, and that they are now trending well above their pre-COVID-19 levels."
- "In 2022 we expect a major restocking-and-destocking trend on the supply side. So when you think about a traditional business cycle, the “restock-and-destock” inventory event can become a really important growth driver, and we expect to see it spur an acceptable level of GDP growth next year."
- "We’re bullish on U.S. economic growth and stock-market performance this year. But we believe 2022 growth will likely be lower versus the rock star year of 2021, and that we’ll see increased volatility in equities due to overall tightening of the markets."
Developed Equities Co-Head of Investments, Ben Kirby, shares his views on the biggest opportunities and challenges in 2022 with Funds Society in the following interview. You can also know more about the expert's investment view through this video.
With 2021 in the rear-view mirror, what are the biggest lessons you’ve learned over the past year? Did anything take you by surprise?
The biggest surprise in 2021 was the rapid recovery in economic activity and the attendant spike in inflation in durable goods. U.S. companies performed strongly, largely passing on higher costs and growing earnings by more than 50% for the full year. It’s worth noting that it only took about a year and a half for U.S. companies to recover their earnings level from the slippage of 2020, and that they are now trending well above their pre-COVID-19 levels. To highlight how remarkable this is, after the global financial crisis of 2008-2009 it took roughly seven years for these numbers to get back to trendline growth. The level of earnings growth and financial-market recovery seen in the U.S. over the past year has been unprecedented as seen in the chart below.
Looking ahead to the new year, what are your expectations for economic growth in 2022 and what does this mean for U.S. equities?
We witnessed supply-chain issues in 2020 that worsened over the past year, and many companies experienced an inventory run down to very low levels. As a result, in 2022 we expect a major restocking-and-destocking trend on the supply side. Companies will replenish their inventory to healthier levels and the supply bottleneck will be largely worked out over the next year, thus easing pent-up consumer demand. So when you think about a traditional business cycle, the “restock-and-destock” inventory event can become a really important growth driver, and we expect to see it spur an acceptable level of GDP growth next year. The big question is whether this will be enough to deliver a sustainable growth trajectory throughout the rest of 2022, or if the trend will peter out as the year goes on. With all things considered, we’re bullish on U.S. economic growth and stock-market performance this year. But we believe 2022 growth will likely be lower versus the rock star year of 2021, and that we’ll see increased volatility in equities due to overall tightening of the markets.
How have inflationary risks and the potential for rate hikes impacted your portfolio positioning?
The Federal Reserve has been in denial about inflationary pressures building over the course of the year, and only recently backed away from their “transitory” language. While we believe durable goods inflation exacerbated by supply chain constraints may ease in 2022, we believe there are at least three longer term drivers of above average inflation: owner equivalent rent rising with a lag to rising home prices, wage-price spiral as bargaining power has shifted to labor, and the energy/low carbon transition, which will require trillions of dollars in capital investment and drive higher energy costs in the medium term. We’re through with the easy money part of this economic cycle, and the Fed, already behind the curve, may be forced to hike rates more aggressively than previously believed. From a portfolio-strategy perspective, that means growth stocks are unlikely to be winners in 2022, and this is especially true for aggressive growth companies that have low or no net profit. With inflationary pressures set to persist through next year, we are underweight higher-growth emerging franchises and instead favor strong businesses that have consistent, stable earnings and attractive valuations. We also think companies that have strong pricing power will be better positioned to pass inflationary pressures to the consumer and to maintain revenues. Higher-margin companies for which labor is not a major component of input costs will also fare better in a rising-wage environment. As an example, payment-network names will be less impacted by inflation because their revenues are tied to transaction volume. These types of companies will have the ability to grow with inflation in the long term. Companies with the ability to make money despite the upward inflation pressure will be better positioned overall. We see such companies not only among financials and banks, but also in consumer discretionary and technology. Lastly, in a rising-labor-costs future there’ll be huge demand for labor-saving technologies, and that will breed new investment opportunities in the automation and semiconductor space.
What are the risks worth keeping an eye on in 2022? What’s keeping you up at night?
As world economies become more interconnected and interdependent, a key risk lies in adverse geopolitical events such as the China-Taiwan divide. These sorts of risks aren’t getting as much attention as they deserve, even though they can have huge implications even for a U.S. equity portfolio. As an example, Taiwanese firms are among the world’s largest contract manufacturers of semiconductor chips that power just about everything global consumers interface with on a daily basis—phones, laptops, cars, watches, refrigerators and much more. The world depends on Taiwan for semiconductors, and the country plays a significant role in the digitaltransformation age that we’re living through. If China-Taiwan tensions result in any disruption on the manufacturing side there could be significant shocks, not only in the semiconductor space but across the global economy. And that’s only one example—so U.S. portfolio managers need to be keenly aware of this overall geopolitical risk factor.
Thornburg is a global investment firm delivering on strategy for institutions, financial professionals and investors worldwide. The privately held firm, founded in 1982, is an active, high-conviction manager of fixed income, equities, multi-asset solutions and sustainable investments. With $49 billion in client assets ($47 billion AUM and $1.9 billion AUA as of December 31, 2021) the firm offers mutual funds, closed-end funds, institutional accounts, separate accounts for high-net-worth investors and UCITS funds for non-U.S. investors. Thornburg’s U.S. headquarters is in Santa Fe, New Mexico with offices in London, Hong Kong and Shanghai. For more information, please visit www.thornburg.com.
For more information, please visit www.thornburg.com