Liontrust: our fund managers’ outlook for 2022 - Flipbook - Page 2
PHIL MILBURN, GLOBAL FIXED INCOME TEAM
Interest rate rises are needed
Central banks are on a tightening path because inflation globally is off the
charts. They believe that small rate rises now will curb consumption and
borrowing and prevent more rate rises in the future.
The market, however, thinks that any
tightening in monetary policy will choke
off economic growth and will quickly be reversed by central banks.
We disagree. We don’t see rate rises as being a potential policy
mistake; our view is that they are needed and will not destroy
economic momentum. Supply chain disruption, a reduction in
globalisation and local tariffs to trade are here for the foreseeable
future. Central banks should have raised rates a year ago to offset
the massive government spending we have seen.
Although the next couple of years are likely to see high inflation
and low real growth, the medium term conditions are now in place
for a sustained boom in real growth as excess savings boosts
consumption, while employment
and wages rise.
As
inflation
continues
to surge, we therefore
expect to see yields rise,
with longer-dated bonds bearing
the brunt of the pain. This is a
contrarian standpoint – one which
we will look to enact further via a
yield curve steepener if the ultralow terminal rates narrative falters
in 2022.
SAMANTHA GLEAVE, CASHFLOW SOLUTION TEAM
Valuation dislocations are at extreme levels
Valuations on aggregate have become very expensive relative to history and companies
are showing increasing signs of over-investment. In many respects, this is a concerning
appraisal for equity investors. However, within the markets there is significant dispersion of
valuations between those stocks that look overvalued and those that seem cheap.
One of the most significant dislocations is
between growth and value stocks, with the former trading on
very high levels while the latter remains historically depressed. The
valuation dislocations we observe today are by far the most extreme
we have seen in our dataset, which
stretches back to the 1980s.
2 - Liontrust Views: Outlook for 2022
The value investment opportunity is one that we also promoted
heading into 2021, but as we look ahead to 2022, we see signs
that the nature of the value rally is changing. We think the value
story is transitioning from a fairly indiscriminate deep contrarian
value rally that started more earnestly in Q4 2020 into what
we would call a rally in recovering value. These are stocks that
are still cheap and lowly appreciated by many investors but are
beginning to show encouraging signs of recovering performance.
This may be apparent in recent revenue or margin trends or, more
subtly, in cash flow and balance sheet statements. We find the
latter investments are typically very rewarding for investors as
stock valuations rarely incorporate these data very quickly.