2022 vision: how investors can have a prosperous new year in the sharemarket

A veteran fund manager gamely steps up to the plate to offer an early take on where to invest in the coming year.

‘Activity levels will remain elevated for the whole of 2022, before it starts a return to trend growth from 2023.’ Picture: NCA NewsWire / James Gourley

The sharemarket outlook for next year, and indeed from late 2021, is for another year of strong earnings growth from select stocks, particularly those exposed to services such as travel, entertainment, ­dining and other recreational ­activities.

Investors can also expect a strong rebound from so-called structural growth leaders.

I expect forward estimates for the next two years will be up­graded, driven by an under-­appreciated pick-up in activity beyond Covid lockdowns.

The December quarter is shaping up to be a very strong period, making up for the lockdown-induced slowing in the September quarter.

Moreover, activity levels will remain elevated for the whole of 2022, before it starts a return to trend growth from 2023.

Next year, 25 of the 32 ASX sharemarket categories are expected to deliver positive earnings per share growth in the 12 months to June 2022 – that’s 80 per cent of the top 200 companies.

Still, investors ask the entirely reasonable question, are shares expensive at these levels?

I do not believe Australian equities are too expensive on average when you consider them in relative terms against where long-term interest rates are sitting, and their forward earnings growth outlook.

We look at the future earnings growth profile for shares when ­assessing if sectors are cheap or expensive. On a forward EPS growth view, resource stocks (specifically battery materials, electrification metals and some bulk commodities), banks, general insurance, structural growth leaders and some of the post-lockdown beneficiaries are offering strong ­potential growth relative to value.

What about inflation concerns? I maintain the view that inflation will prove transitory. Cash rates have not risen, in fact they have only fallen since the global ­financial crisis over 13 years ago.

With this in mind, and noting that bond yields during Covid were driven lower by QE, we have seen cash rates fall to levels never thought possible, so it is not unreasonable to expect rates to start to rise.

Since the GFC, bond proxies have enjoyed a significant rerating on lower bond yields and refinancing costs.

Banks have suffered via continued downward pressure on margins, and general insurance companies, due to short-duration investment income exposures, have had investment returns and overall insurance margins crunched. These negative long-term influences on earnings for these sectors are now starting to turn positive, while the opposite is true for bond proxy sectors.

Fundamentally, we believe the economic environment is favourable for shares and will be for the next year or so.

Globally, China remains a concern, from both a geopolitical and trade perspective. China remains on watch for us, but we are of the view that eventually there will be a return to more cordial global relationships as there is mutual benefit across nations in peaceful and vigorous trade.

Investors will be wary of any sign of governments or central banks backing away from their commitment to stimulating recovery other than actions associated with the steady normalisation of monetary policy. We do not see any signs of this so far.

Of course, any resurgent reinfection issues or return to lockdowns and border closures would be a concern, but with vaccination rates so high this risk is low. Furthermore, the breakthrough of a Covid-19 antiviral pill by Pfizer could be a game changer.

There is the risk that the effervescent return of growth post-lockdown brings forward inflation, but for the reasons we have argued we see inflation as not causing concern in the near term.

There are some compelling thematics and tactical developments that are delivering opportunity in the market based on forward earnings growth.

In resources, the shift towards decarbonisation, which will see more commitment after COP26, is offering compelling opportunities in the electrification and battery materials metals (copper, nickel, lithium and cobalt).

We like BHP as a diversified exposure to these themes, and companies such as OZ Minerals and 29Metals in copper and zinc, Orocobre in lithium and IGO in nickel and lithium, and Lynas in rare earths. Macquarie Group also ­offers good exposure to the decarbonisation and electrification structural thematic.

Paul Xiradis.

We like the major banks (NAB and CBA more specifically) as they benefit in positive economic growth conditions, when rates are firming, and have strong capital positions.

We are entering an environment where general insurers will benefit from stronger margins and returns, with companies such as QBE of interest in this sector.

Finally, post-lockdown, with borders reopening we see positive earning growth outlooks for companies such as Qantas, Webjet and Seek. We see structural leaders with sustainable growing income streams and large unassailable business models doing well, such as Ramsay Health Care, CSL, ResMed, Xero and IDP Education.

Looking further ahead, we expect cyclical leadership will change, but as a grouping will continue to perform, with strong earnings outlooks for 2022. Quality growth and structural leaders are also offering a strong earnings rebound into 2022 and 2023.

Our view is that 2023 earnings expectations will also be positive, with growth driven by a strong post-Delta variant bounce-back, which will be evident in the final months of this calendar year, and will have duration into 2023.

Paul Xiradis is executive chairman and chief investment officer at Ausbil Investment Management.