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Wealth Management

Investment outlook 2022

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EQ’s Chief Investment Strategist, Kasim Zafar, summarises the causes of recent volatility and details the upcoming drivers of change that could influence markets in 2022.

The last few months have been challenging for financial markets as a confluence of factors have provided headwinds. These include the emergence of the Omicron variant, persistently high inflation (especially in the US & UK), a resulting sharp pivot in US & UK central bank policy direction and geopolitical risk around Russia & Ukraine. So, what’s going to happen in 2022?

 

Growth assets

We believe disruption from the omicron variant could prove sharp but short lived. Meanwhile, we hope the balance of probability lies in economic sanctions on Russia rather than a hot war. The consequence of this will most likely be higher energy costs for European consumers, adding fuel to inflationary pressures. If it does escalate into military action, we will assess whether the negative impact on portfolios could be short lived or warrant further caution in terms of our portfolio’s exposures.

Consequently, the biggest factor shaping our short-term outlook is inflation, especially in the US. Further research has served only to confirm the wide band of uncertainty around the inflation outlook. A key structural change that appears to be taking hold is a lower US workforce participation rate as some over 55’s retire early, creating a shortage of workers. Companies are paying higher wages to get the labour they need.

While some price rises are almost certain to be a pandemic phenomenon (like cars, which usually depreciate), higher wages have the potential to broaden inflation pressure. If these wage increases are a one-time pandemic phenomenon to get people back into work, the pressure on consumer prices should dissipate. For now, bond markets look like they have priced in sufficient interest rate increases to keep long term inflation under control. But as mentioned earlier, the band of possibilities is unusually wide.

This uncertainty has made it a difficult period for performance of several growth asset categories. If inflation pressure moderates, we believe parts of the market that have been hardest hit could bounce back strongly. If inflation pressure continues, it is best to be invested in high quality companies with strong pricing power, that can pass through cost inflation to their customers; or indeed to be invested in sectors that directly benefit from higher rates & inflation (like financials). In the short term, therefore, we are focused on the balance of portfolio exposures, given the wide band of possibilities.

With a medium to long term horizon, our confidence in the fundamental value and growth outlook of our portfolio holdings has increased.

And that’s because there are some inescapable truths:

  1. Humanity still faces a climate crisis.
  2. Global demographic trends and resultant healthcare needs are unchanged.
  3. Technological disruption continues across ever more industries.

Let’s explore these in more detail.

 

Thematic investments 

We define thematic investments as ones that have a clear driver of growth in the long term. Our favourite themes are climate solutions, healthcare innovation and a variety of technology sub-themes.

 

Climate solutions

Tackling the climate crisis needs to remain at the forefront of the world’s focus in 2022 and beyond.  We expect the private and public sector to embed climate change as a priority.

Since COP26 we have seen “climate risks” materialise further. For example, the EU carbon permit price is at all-time highs, trading at EUR85/tonne (up from just 33 in early 2021). This creates a higher cost of doing business for laggards in high-emitting industries, but a competitive advantage for climate solution companies. Investing in energy efficiency solutions that avoid carbon which can decarbonise industry, has a clear long-term tailwind.

Renewable energy companies may have underperformed recently, but the long-term need is ever-increasing. We think the economics of renewables speak for themselves. Particularly in technologies like onshore wind and solar, it is now cheaper to generate electricity from renewables than it is from fossil fuels even when adjusting for subsidies. As the roll out in renewable technologies continues, the cost will continue to fall making the difference ever larger. In addition, none of these companies have credible decarbonisation plans that are in line with global net-zero by 2050 pathways. While they may be enjoying their day in the sun given rising oil prices, the embedded climate transition risks are now an even bigger downside for their investors.

For companies involved in climate solutions, the aggregate consensus forecast for year-on-year earnings growth is currently about 20%. Our climate specialist fund managers believe these consensus estimates continue to underestimate the growth potential and they have been adding capital to their highest conviction ideas.

 

Healthcare innovation 

Developments in some areas of healthcare have accelerated through the pandemic. Our healthcare specialist fund managers liken current innovation to that in e-commerce a decade ago.

Gene therapy and other personalised medicine has real potential. Innovative companies are using cheaper gene sequencing (by companies like Illumina) in conjunction with recent advances in protein modelling to create platforms for drug discovery. For example, the mRNA vaccine technology by companies like Moderna is already being applied to other diseases, such as cancer, HIV and more. If these unique therapies continue to pass through the various testing phases, the potential total addressable market is huge.

But innovation in healthcare goes far beyond drug development. The pandemic has taught us all about remote working, and remote healthcare is no exception. Some insurance companies, such as Ping An Healthcare in China, are at the forefront of providing video call based primary healthcare. The NHS and insurers are backing these solutions in the UK. But the possibilities continue beyond GP facetime. Abbott Labs are at the leading edge of medical wearable devices and implants that can help patients with diabetes through to those needing neuromodulation to control tremors. By connecting through smart phones, physicians can monitor and adjust treatments completely remotely.

 

Technological disruption 

The pace of technology adoption is accelerating. It took 50 years for the telephone to reach 50 million users. It was 22 years for the television. Facebook took just 3 years and for the augmented reality computer game Pokemon Go, it took just 19 days.

Modern technology has a habit of displacing incumbents, and this accelerating disruption is not just happening in consumer products, it’s happening across all industries. Advances in robotics are allowing more jobs to be automated, increasing the quality of work for human labour. Cloud computing offers cost savings, scalability, high performance, and the ability to apply advanced computational techniques like machine learning and artificial intelligence. Even in a sector like construction, technology like smart sensors and climate control software are making buildings more energy efficient, while advances in computer aided design and 3D printing are expanding possibilities further still.

The next stage of disruption is being heralded as the fourth industrial revolution. In a hyper connected world with large scale data analytics and high bandwidth 5G communication networks, we are already seeing efficiency gains for smart buildings, connected logistics networks, smart grid automation and precision agriculture. Meanwhile, we are just opening the door on remote service sector work like healthcare, design collaboration, education, and training.

With the accelerated pace of adoption creating an expanding addressable market, we see a robust growth outlook for several technology sub-sectors. With software businesses having maintained 30-35% margins consistently since the mid 1990’s, current valuations of some sector leaders are incredibly attractive for long term investors.

 

Defensive & alternative assets 

As with growth assets, inflation is the central source of uncertainty in fixed income markets. Simplistically, as prices rise (inflation), a fixed coupon payment (say of 2%, or £2 in real money) will buy you less than it did before. This leads to the prices of bonds falling as their coupon income streams become less valuable. You are probably wondering why anyone would hold fixed income investments in the current environment. The answer is straightforward – these investments play a key role in diversifying portfolios.

This year more than ever, it is important to invest in fixed income carefully. Certain types of fixed income investments are more vulnerable to high inflation and rising rates than others. Where portfolios can do so, we previously increased exposure to inflation-linked bonds (whose coupons and principal values are linked to the rate of inflation), floating rate bonds (whose coupon payments increase as interest rates rise) and bonds with shorter duration to maturity (the proceeds from which can be reinvested at higher yields).

Each of these have proven resilient over the last few months as interest rates have risen, outperforming bonds with longer durations to maturity.

For portfolios that can invest in alternatives, we prefer real assets that have capital appreciation potential while also offering inflation linked income, such as infrastructure.

 

In conclusion

As the market has adjusted to greater inflation uncertainty, it has reappraised the cost of capital overall. This resulted in weakness for some pockets of the market which only served to weaken sentiment further still. While uncertainty remains rife, our focus remains on the balance of risk within portfolios.

At the same time, the valuations of some companies leading the charge across longer term themes are now incredibly attractive for investors and we see our specialist thematic managers selectively adding to their highest conviction ideas.

 

Top 10

Turn the data landfill into an insight goldmine

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Andrew Watson, CTO, MHR

Today, businesses have access to a wealth of data, with vast amounts of information created daily. While tools exist to help companies make sense of it and take advantage of the critical insights that data can bring to drive stronger business growth, many organisations are simply overwhelmed with the volume and velocity of data collected. With this, there is also a sense of uncertainty on how best to leverage this to create data driven insights.

Disjointed processes and dormant ‘shelfware’ are keeping a wealth of data stuck in silos – untapped and underutilised. As a result, nearly three fifths (57%) of UK organisations say they believe they are making business decisions based on inaccurate data. Without a clear strategy to guide them, organisations will be running blind, unable to access and get value from the relevant data to make stronger predictions and smarter decisions.

And the longer data is left untouched, and the more of it that is generated, the harder it will be to leverage it to its truest potential. Organisations must urgently recalibrate their relationship with data and learn how to integrate and analyse it to find trends and useful information. Leaders should see this as an opportunity to utilise the right tech solutions to harness the power of data as a vital source of competitive advantage and turn a digital landfill into a goldmine of data.

 

The data treadmill

Andrew Watson

Every day data is captured by every department in every business. No matter how big or small an organisation is, it is generating invaluable insight from customer patterns to trends on the efficiency of internal processes.

But with this level of data generated, many are finding themselves on a data treadmill, constantly working to ‘catch up’. These organisations are failing to make progress as they are not utilising or optimising the data tools at their disposal. In fact, very few companies are fully embracing the spectrum of tools and methodologies available. Most businesses are spending disproportionate amounts of time on manual data processes, resulting in a ‘reporting lag’. By focusing on simply managing the mechanics of data, such as moving and storing it, businesses are struggling to unite and access real-time data insights, instead creating disjointed silos that lack the enterprise-wide connectivity and visibility needed to identify where processes can be improved.

For other businesses, the challenge comes from not knowing what they want to achieve with the data, or that they have data at their disposal at all. Unused, unanalysed data is a missed opportunity for leaders to create real business value. This is not helped by organisations rushing into buying new systems during the pandemic and subsequently leaving them gathering dust, or only being used at a fraction of their full potential. In other cases, data scientists have been brought into an organisation, but do not know where to start, as the wider business lacks a smart data strategy underpinned by clear objectives. All too often, analytics are left as an afterthought.

Businesses need to become more data savvy lest they continue to fall even further behind. Not only do leaders need to ascertain what decisions their company needs to make, and where they can get the data to support these choices, but they also need to change their data strategy by putting in place the tools and people that can integrate the data to find previously unknown information.

 

Uniting business strategy and data strategy

However, this requires the organisation to have a business strategy that aligns with its data strategy, so that the data being captured can be used to measure improvements and ultimately drive business growth – after all, more than nine in ten (91%) organisations recently surveyed by MHR acknowledged data-driven decision making as an important factor in their development.

A strong data strategy is a cultural shift that requires top-down leadership. Leaders can ensure that the purpose and use of data within an organisation is directly linked to the core business goals, while guaranteeing that a new data-optimised culture is developed end-to-end throughout the company, bridging the gap between business strategy and implementation. In turn, aligning business and data strategies enables organisations to accurately measure the success of their current approach, providing them the next steps they need to take to continuously improve.

While data scientists can be viewed as a solution, they do not have the in-depth knowledge of how the business operates to ensure true strategic alignment. Alternatively, businesses can leverage the right technology, such as an integrated software solution, to ensure that their business and data strategies are fully intertwined throughout the organisation. With this in place, complex data processes can be streamlined and simplified through automation, empowering businesses to make informed strategic decisions from reliable and accurate data.

With technology in place, business and data strategies can be brought together and can generate eye-opening insights that keep companies on top of their data, ensuring that they are not running blind in the race towards data maturity.

 

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An Entrepreneur’s Guide to Investing in Bitcoin

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By

Marcus de Maria, Founder and Chairman of Investment Mastery.

 

Over recent years, Bitcoin has been steadily growing in popularity among today’s investors. At the same time, there has been a lot of debate about Bitcoin, and other cryptocurrencies, and their value.

Its supporters argue that it is the future of currencies and investment; its critics are adamant it’s not all it’s cracked up to be and might not make the big profits people are expecting.

To better understand its true stature in the market, we need to look at recent developments. For instance, Bitcoin’s valuation has risen by more than 763% in just one year, easily surpassing the rise in the traditional stock market.

With more and more people buying Bitcoin, it is now gaining the attention of the mainstream financial institutions and platforms, when once Bitcoin was derided, joked about and said would never last.

Marcus de Maria

Fast forward twelve years since its’ launch, and we have Tesla and SpaceX mastermind Elon Musk recently announcing that his car empire will not only buy $1.5 billion-worth of Bitcoin, but will accept cryptocurrencies as payments in the future.

And well-known FinTech companies such as Square and PayPal have also announced their intention to support Bitcoin in the future.

Despite this, the most important Bitcoin development is, perhaps, the recent initial public offering (IPO) of Coinbase Global, Inc. (NASDAQ: COIN), today’s leading cryptocurrency exchange platform.

There is no doubt: Bitcoin is gaining momentum. Recent developments have contributed to the sharp rise in the value of Bitcoin, and asset proponents believe this is just the beginning.

 

Bitcoin background

Bitcoin was created in 2008 by a programmer, or group of programmers, under the pseudonym “Satoshi Nakamoto”. Twelve years on, and the true identity of Bitcoin’s inventor is still unknown, adding a little mystique to this already enigmatic entity!

Essentially, Bitcoin is a cryptocurrency. A cryptocurrency is a virtual “coins” or “tokens” and used in digital cryptocurrency systems instead of physical cash.

Similar to physical fiat currencies, digital coins have no intrinsic value, and are not backed by gold or silver.

Bitcoin is one of the most widely used of the thousands of cryptos now available to the investor.

Considering that the great attraction to crypto is that it’s a decentralized currency, thousands of different types of coin in “circulation” is a big giveaway to how popular it is among users and investors.

What gives Bitcoin its value is the fact that there will only ever be 21 million bitcoins “minted” or “mined” to give its proper definition (more on this in the future).

It’s this scarcity that provides the value, although one Bitcoin can consist of multiple denominations, the smallest being a “satoshi” which is 0.00000001 of one Bitcoin (or BTC as it is also known).

 

Bitcoin & The Blockchain: How does it work?

Bitcoin exists solely on the “blockchain” in “wallets.”

A wallet is the digital equivalent of a traditional bank account for fiat currencies such as dollars, sterling, yen, etc.

The blockchain is a public ledger that is totally transparent and accessible to everyone who uses the blockchain and bitcoin, and now any crypto that is in existence.

Transactions on the blockchain are “peer-to-peer”, meaning the transaction doesn’t go through a “middleman” (i.e. third party that would normally charge a fee for making the transaction).

Crypto transactions also undergo thorough verification and confirmation.

Crucially, every transaction and record of bitcoin activity is encrypted which means no one knows who owns any one bitcoin or where it goes to and from, unless they publically declare it (although the identities can eventually be detected under special police powers in cases of suspected fraud).

Only the transaction itself is recorded and is made visible to anyone.

That is why Bitcoin is a cryptocurrency (or crypto), because it has an extremely high level of privacy to it via cryptography.

“Crypto” comes from the Greek word “kryptos,” meaning hidden.

Bitcoin wallets operate via secret key.

This key is used to “sign” transactions. It provides mathematical proof that the transaction has come from your wallet (or owner of the transacting wallet).

This secret verification stops the transaction from being tampered with once it has been issued.

All transactions are confirmed and appear on the block chain network within 10-20 minutes.

It is this security and the fact YOU – and not the banks – are truly in control of your digital money that is so appealing to users and investors alike.

 

What to consider when investing

Firstly, and arguably most importantly, is risk-factor. Investing in Bitcoin as an individual is a lot less risky than investing as a business.

The mentality must be, ‘this is my business’s money. I won’t speculate with my business’s money, and I am not going to risk my employee’s livelihoods. Yes, I would be crazy not to invest but it would be crazier to risk it all.’

It’s very easy to go all-in and invest a large sum of money when you have it, but that is not really a sensible strategy.

So, to start with, entrepreneurs and business leaders should consider the risks, diversifying their portfolio and starting small.

 

Other Bitcoin Investment Options

There are different options when it comes to investing in Bitcoin.

First, you can invest in a company that uses Bitcoin technology so you will be exposed to it without purchasing it directly. When the value of Bitcoin goes up, the company shares go up too, providing a return on your investment.

I can’t invest in Bitcoin through my ISA, but investing in a company such as Block (previously known as Square) means I have an indirect tax-free investment opportunity in Bitcoin. Investing in a company that utilizes Bitcoin can be more volatile than Bitcoin itself, so more money can certainly be made.

Investing solely in Bitcoin is different, as it doesn’t move so much in value, but the individual company using Bitcoin can go up and down sometimes by 80%.

Buying Bitcoins directly from an app like Coinbase allows investors to “physically” own the asset.

This is an important distinction to make, as Coinbase allows investors to actually buy Bitcoin and store it in their own crypto wallet. That way, investors will be able to gain access to the coin’s price performance and use it as the currency to make other trades.

Owning a standalone Bitcoin is no different from owning any other currency, except for the incredible fluctuations in value.

 

To invest directly into Bitcoin here’s how to get started:

  1. Sign up to an Exchange
  2. Enable two-factor-authentication for security
  3. Get a Bitcoin wallet
  4. Connect the wallet to a standard fiat bank account
  5. Place your Bitcoin order
  6. Manage your Bitcoin investment

When the set-up is complete, what you really need to consider is, how much do you know? I am a firm believer in spending at least 20 minutes a day educating myself on investing. I’ve seen too many beginner investors ignoring that advice and rushing in without understanding how it all works.

Surround yourself with people that understand crypto investment and dedicate time to reading up on strategies and tips that will benefit all investments you make.

Bitcoin is certainly a crypto asset you should be investing in alongside a diversified portfolio. It is certainly a highly volatile asset with large and rapid price swings, which in turn can offer the potential for large returns but also carries a high level of risk.

Before making any decisions, it is critical that you learn how to invest in Bitcoin responsibly and utilise proven, reliable strategies. Once you feel confident with your approach, take that first brave step.

As Warren Buffet once famously said, “Be fearful when others are greedy, and greedy when others are fearful.”

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