Fund managers lock in 2022 investment plans ahead of inflation and economic uncertainty

Australia’s fund managers have locked in plans for 2022 as markets prepare for economic uncertainty, inflation, and the outcome of the Covid-19 pandemic.

Wilson Asset Management’s Geoff Wilson said he was keen on ‘sectors that have been negatively impacted by the pandemic’ but cautious of companies trading on high valuations in the tech sector or exposed to inflation and rate rise risks. Picture: John Feder

Investment managers are preparing for an uncertain 2022, but many have already made moves to lock in protection against inflation and the future of the Covid-19 pandemic menacing the world economy.

With shifts in the currents of global money markets and the potential flow on to equities markets investment managers are switching tack to prevent losses.

Many market watchers have already marked in a lift in the US cash rate in a bid by the country’s central bank to head off rising inflation.

However, questions abound as to how hard or fast the US cash custodians will move to head off inflation arising as a result of the pandemic or whether the rising costs of goods and wages is transitory or here to stay.

Totus Capital founder Ben McGarry said equities markets had been riding a strong run in prices since April 2020, but the rate of growth was slowing as governments pulled back spending and stimulus.

“That means 2022 should be a little more interesting and probably not just one way traffic in equity markets,” he warned.

“It’s going to be harder for equities than it was in 2021 and we should expect some volatility.”

Markets have already started pricing in changes in the fortunes of Covid-19 winners, with stocks exposed to the stay at home phenomena copping a belting.

Tech stocks on the US market have been jawboned by investors, with prices on some falling as much as 80 per cent from their early pandemic highs.

But, Mr McGarry said Totus Capital saw “some good businesses”, like their holdings Wix, Spotify, and Hello Fresh as holding good opportunities in the long run.

“We think things like shopping centre (real estate investment trusts) look like reasonable value on 5 per cent yields and 20 per cent discounts to book value,” he said.

However, Mr McGarry said they were also holding defensive investments to safeguard against potential inflation, with stakes in Visa and MasterCard.

Mr McGarry said the sentiment in the market had turned after the bull run kicked off in April 2020.

“The first half of 2021 was risk on: crypto, SPACs, loss making companies all led the market higher,” he said.

“The last six months the SPAC boom busted, the unprofitable tech companies have been massacred.

“That tells you something has changed, the market is playing a bit more safety first high, quality companies that generate a lot of cash.”

Wilson Asset Management chairman and chief investment officer, Geoff Wilson, said risk appetites had run amok during the heady pandemic market.

He said low rates had seen risk not priced into investor’s thinking.

“The bull market that has been an incredible wealth creator for millions of people will inflation bring it to an end?” he said.

“Everyone’s positioned the same way, which to me provides more risk because when things change everyone decides to change their asset allocation – instead of buying equities and bonds they go the other way to selling.”

Mr Wilson said his eponymous investment manager was keen on “sectors that have been negatively impacted by the pandemic” but companies trading on high valuations in the tech sector were exposed to inflation and rate rise risks.

He said Wilson Asset Management was “selectively overweight” in several investors, including Premier Investments, Accent Group, City Chic Collective, and Lovisa as well as other companies that will reap the benefits of reopening.

“Record stimulus, and reduced expenditure have greatly improved household balance sheets, which should support spending on goods and services as conditions normalise,” he said.

Tribeca Investment Partners chief executive and portfolio manager Ben Cleary said his fund was “the longest (in terms of net and gross positioning) we have been in 10 years given the strong outlook for the resource sector into 2022”.

Mr Cleary said the Tribeca Investment Partners portfolio remained heavily skewed to “green policy beneficiaries” taking in holdings in “copper, nickel, lithium, rare earths, uranium and carbon credits”.

“Fossil fuels [are] becoming more expensive as they pay higher carbon prices (oil and gas) and renewables [are] becoming more expensive (especially wind/solar) as their inputs copper/steel/rare earths pay higher carbon prices,” he said.

Mr Cleary said the investments in carbon, one of Tribeca’s single largest, came in the form of “nature based projects in Asia and Australia”

“We see prices continuing to rise in 2022 as demand materially outstrips supply,” he said.

“Very similar to other commodities, carbon project supply will be much less than consensus expectations in out view which could see prices rise much faster and higher than expected.”

“Supply risk for all carbon certificates/credits is very high in our view.”

The investments by Tribeca come after a results season that saw many players in the ASX 100 hit with investor pressure over carbon emissions.

Macquarie analysts note shareholders are increasingly clamouring for companies to make moves to reduce emissions, with average support for resolutions lifting to 34 per cent in 2021, up from 23 per cent in 20202.

The investment bank said the last four years had seen a significant lift in the numbers of shareholder resolutions focused on climate change.