Investment highlights: Sustainability ruled 2021 and will rule 2022

One, if not the most important dynamic this year, has been the further embedding of environmental, social and governance (ESG) criteria in investment processes.

We have seen a number of asset managers pledging to reach the net zero target by 2050 at the latest. Completely cutting carbon emissions will be both at the corporate and portfolio levels. This trend is set to continue in 2022 and we shall see further asset managers committing to this objective.

The transition to a more sustainable economy presents both opportunities and risks. Adopting a net zero policy presents both opportunities and risks as it also redefines the investment framework. This is something Money Marketing explored in depth in its cover feature in August 2021.

As investors seem more and more willing to include ESG metrics in their portfolios, asset managers will continue to launch new sustainable funds.

After years of political turmoil after the Brexit referendum followed by the breakout of Covid-19, some consider that the UK market is well positioned to benefit from the reopening of the economy.

This is thanks to a swift vaccination campaign, an early and gradual re-opening of the economy, and a relative political stabilisation.

Small and mid-cap firms benefited from this economic weather, with UK small cap funds delivering good return in the third quarter of 2021.

As the recovery continues, investors might want to consider value stocks. Based on analysis of previous recoveries from global recessions, Morningstar Investment Management found that value significantly outperformed growth.

Yet, the new Omicron strain could be the troublemaker rocking the boat. So far, it seems the market considers that this new Covid variant is a mild threat. Time will tell.

There’s also been a lot of discussions around active and passive investment, with more and more portfolios tilting toward passive. The argument is that active management is expensive and not always value for money.

There is no doubt that this debate will continue in 2022.

The place of bonds in portfolio has also been put into question. The debate around the viability of the 60/40 portfolio has been going on for years, but the growth of inflation has certainly intensified the conversations.

Some even consider that 100% equities portfolios are the way forward, others consider that the 60/40 model simply needs tweaking.

In October 2021 the UK also became the first country in the world to launch sovereign green bonds.

Yet, with a 0.65% fixed annual rate over a three-year term, the UK green bonds have failed to spark a lot of enthusiasm.

Will the eagerness to fund green projects make it up for the modest returns in the mind of investors?

In any case, other countries also have plans to launch their own sovereign green bonds. Perhaps, they will offer higher fixed annual rates?

China was at the centre of attention in the second half of 2021 with regulatory crackdowns and Evergrande’s default.

Generally speaking the industry was not too anxious about these disruptions and consider that China is adjusting its regulatory framework to its new needs.

India has also experienced a very good year, delivering high returns for investors.

A rapid digitalisation, a young and abundant workforce, low costs of production and a government keen to support private businesses will sustain this trend in 2022 and in the years ahead.

Some actors in the industry suggest that India is at the beginning of an economic cycle that will reflect the one China experienced from the 1990s until now.

In spite of a poor year, Japan could be an interesting place for investors to be in 2022.

Japan is behind the US and Europe in its recovery and still has a significant amount of catch-up to achieve.

Valuations of Japanese equities are also attractive compared to their developed market peers and Japanese businesses are taking measures to improve profitability in reaction to the outbreak of the pandemic.

Also, Japan does not have the propensity of being an inflationary economy. The Bank of Japan is not very likely to raise interest rates.

Therefore, Japan will be particularly attractive if other big central banks raise interest rates and tighten monetary conditions.

It has also been a very good year for venture capital trusts (VCTs), which are on track to break its own record of funds raised within a single tax year.

Some suggest that alternative assets such as VCTs and Enterprise Investment Schemes are not only seen as tax efficient vehicles anymore, but also as investment products in their own right.