As one year ends and another begins, investors have the opportunity to reflect on their portfolios and prepare for some of the major trends that are anticipated in the coming year.
In its global market outlook for 2022, State Street Global Advisors listed three investment themes that are expected to play a major role over the next 12 months.
After significant developments for climate change in 2021, including the COP 26 summit and a wide range of net zero commitments from governments and businesses, State Street believes there is little doubt that climate will continue to dominate in 2022.
EMEA head of ESG investment strategy at State Street Global Advisors Carlo Maximilian Funk said that climate change’s impact on the global economy had only just begun.
“In our view, investors should think of the transition to a low-carbon economy as a multi-dimensional shock event, spread out over time, that will have major regulatory and economic consequences and profound investment implications,” he said.
“Investors who think the pace of climate-related change in markets/economies will be slow could be in for a major surprise.”
Mr Funk said it was important for investors to consider their exposure to the fossil fuel sector and the risks associated with these investments.
“A massive economic depreciation exercise for carbon-heavy assets, alongside an appreciation exercise for carbon-neutral assets, is looming, and this situation will present risks as well as opportunities,” he said.
“Investors with a solid understanding of the regulatory and economic implications of the transition to a low-carbon economy can build more resilient portfolios and take advantage of these opportunities.”
The importance of engagement rather than divestment, disclosure improvements driven by regulatory change and the impact of decarbonisation on corporate earnings were also raised as important issues for investors to consider.
The role of fixed income
Another major trend for 2022 will be the role of fixed income amid the ongoing low interest rate environment that is expected to persist in the year ahead.
“Investors are justifiably considering alternatives to fixed income that may offer more return potential,” said global head of fixed income investments strategies Thomas Coleman.
“But focusing on return alone can lead investors to overlook the critical role that fixed income can play in diversifying portfolio exposures.”
The risk diversification benefits of developed market bonds, particularly US Treasuries, could be used to offset pain in risk assets, according to Mr Coleman.
Additionally, the relative liquidity of public fixed income compared with illiquid private assets may allow investors to efficiently implement asset allocation shifts within their portfolio during market volatility.
“We also think it’s important not to overlook the potential for certain areas of the fixed income market, including emerging market debt, to provide meaningful returns and yield enhancement,” added Mr Coleman.
Reviewing exposure to China
For its final major trend of 2022, State Street Global Advisors suggested it was time for investors to reconsider their China exposure.
Through examination of the underlying trends within the country, the firm maintained that Chinese assets were still appealing despite a number of negative developments in 2021 such as the economic slowdown and regulatory intervention.
"Investors should consider positioning their China exposure on a standalone basis, with a preference for active strategies and an expectation that their China allocation’s portfolio share will grow,” said State Street Global Advisors head of policy research Elliot Hentov.
“Given China’s idiosyncratic features compared with other emerging markets, the ongoing evolution of its growth story, and the unique risks involved, we believe that investors would be well-served to give particular, dedicated consideration to China investment.”
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
