- Potential for a new value rally in 2022, although by no means certain
- Japan attractive market after marked underperformance
- Dominant global theme will be carbon reduction and beneficiaries of a move to a low carbon economy
As we look to the year ahead, Jeremy Podger, portfolio manager of the £3.4bn Fidelity Global Special Situations Fund, discusses how he sees decent upside potential for equity markets in 2022, but with some bumps along the way.
“We believe there is good potential for upside in global equities in 2022 but it could be a bumpy ride. Markets could conceivably “melt up” further but are likely to be constrained by central bank policy becoming somewhat less stimulative in the US and globally.
“Company earnings continue to move in the right direction. However, on an absolute basis, valuations look a little stretched with only the UK, Japan and emerging markets being reasonably valued compared to long run history.”
“We see potential for a new value rally in 2022, although this is by no means certain. To put the value conundrum into context, the MSCI World Value Index has lagged the Growth Index by over 100% over the past five years and is on a lower P/E ratio now than it was five years ago. Effectively all the re-rating that markets have seen has been in growth stocks. The portfolio has had a moderate value bias throughout 2021 and, depending on bottom-up stock opportunities, this may continue in the new year.
“After marked underperformance, Japan appears to be an attractive market for 2022. The LDP government has cemented its position after the recent general election and we do not expect negative policy change. The weakness of the yen in 2021 should be a benefit to exporters and Japan should also be a beneficiary of any stimulus in China.
“In general, we are still cautious on emerging markets (EM). Unlike developed markets, they have not seen a rise in underlying profitability over the past several years and most EM countries have not had the fiscal flexibility to boost their economies through the pandemic. They appear relatively cheap, but not to the extent seen say at the height of the tech bubble in 2000.”
Positioning for what lies ahead in 2022
“The dominant global theme going in to 2022 has to be carbon reduction and beneficiaries of a move to a low carbon economy. We saw this as a strong theme at the end of 2020, but now there are far fewer signs of bubble-type valuations here. In 2021, we initially took profits in “green” stocks but subsequently have invested in new names that address this theme.
“We have slightly reduced exposure to technology in 2021. We see some high growth names as arguably very overvalued, but still think there are many exciting names that offer both reasonable growth and good value. Although we expect strong economic conditions, we have increased exposure to healthcare (normally seen as economically defensive) due to a combination of growth as countries invest further in related infrastructure and attractive valuations after lacklustre performance in 2021.
“Our stock selection is driven by our bottom-up process and we continue to find many new opportunities in most sectors and regions in our three stock investment categories.
“Within the Corporate Change category, we have seen significant M&A activity in 2021 and expect this to continue in 2022 along with a likely increase in demerger or spin-off activity. In the Exceptional Value category, we find opportunities in many areas including financials (which have performed relatively well in 2021) although it is hard to have conviction on resource names which appear cheap at this point thanks to elevated commodity prices. Amongst growth stocks (Unique Businesses), we have recently found opportunities in industrials and healthcare, but see medium-term valuation risk among many of the “hyper-growth” names.”