How quickly can the world readjust, coming out of a global pandemic? In this video, Portfolio Manager Luke Newman highlights some of the drivers that will determine the prospects for absolute return in 2022.

Key takeaways:

• We expect to see a repeated oscillation between value and growth as rising demand meets ongoing supply chain issues, economies seek to normalise, and stimulus measures continue to roll off.
• The UK market currently looks attractively priced, in absolute terms, despite a huge surge in merger & acquisition activity since the conclusion of the Brexit saga.
• We see absolute return as a useful diversifier for investors following a period of exceptional returns in financial markets from both equities and bonds.

Transcript Expand

The outlook for equity long/short looking forward into 2022 will be similar in terms of the drivers to most asset classes. This continuation of a focus on the rate of recovery in terms of demand as stimulus measures begin to roll off and economies get back to normal, married with a focus on supply chains. How quickly can the world re-adjust coming out of a global pandemic.

This in turn will lead to a repeated oscillation between value and growth trends, and when we look forward towards the end of the first quarter in 2022, the base effects and the rate of change analysis that we have done means it is very hard for upside surprise in terms of GDP and inflation. So, we are looking forward at that point to maybe being an opportunity to tilt the portfolio back towards higher quality, high-margin compounded growth-type companies within our long book, and maybe looking at some of the cyclicals on the short [side] again.

The other area I would highlight would be the UK market. We invest across the US, and most of Western Europe, but the UK market still looks cheap in absolute terms. We have seen a big change in terms of a huge M&A cycle that has begun since the culmination of the Brexit talks, so the corporate world [is] reassured that there is no political trapdoor to walk into. But public markets are lagging. So after reversing out long-held net short position to UK domestic assets a year ago we have continued to maintain a prominent long exposure to UK assets.

The biggest risk within our market I would say is liquidity. It is one of the reasons why we always focus on large- and mega-cap companies within developed markets. So, we don’t move down the market cap scale. We don’t move into less liquid regions. The strategy and our ability to deliver a consistent, stable absolute return relies on our ability to be flexible. None of us know what is coming round the corner. None of us know where the next pandemic or political shock is going to come from. So having the flexibility through liquid assets to be able to protect initially, and act as a shock absorber, and protect capital to the downside, as well as moving to take advantage of opportunities is absolutely crucial. So anything that affects liquidity, and there have been some hints and concerns over the last 18 months, in areas of the bond market and indeed the equity market, so that is an area we watch very, very closely.

If you are considering an investment within absolute return as a diversifying asset class, I would say [we have had] a decade or so of an exceptional period in global markets, where we have had equities (particularly US equities) and the bond market correlating (that’s very unusual – great on the way up). But when we are looking at a sustained inflationary response and we are looking at a reversal of some of the very loose monetary policy we have had in place over a number of years now, actually the risks in terms of fixed income in particular not acting as protecting shock absorber within your portfolio, must be elevated.