Future returns: reset investment expectations for 2022

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While economies around the world are strong, high valuations of public companies and the likelihood of interest rate hikes mean investors are redefining their expectations for returns.

“This next phase of the economic cycle is certainly going to be slower than the record rally and pivot in the cycle that we have seen over the past two years,” said Amanda Agati, chief investment officer for PNC Financial Services Asset Management Group. “We think it will be a much more difficult task.”

Keep in mind that this more difficult outlook comes after a year in which the S&P 500 index rose almost 27%, ending a three-year period where the market index rose by more than 90%, according to Dow. Jones Market Data.

For 2022, the S&P 500 is expected to gain 9%, which, in a non-pandemic environment, would certainly be seen as a “home run for large-cap domestic stocks,” Agati said. But compared to the last three years, it is certainly lower.

In terms of public debt, the PNC is even more cautious. While the bank expects a “lower for longer” interest rate environment to persist over the next several years, its economists expect rates to rise globally in 2022, exerting pressure on the prices of most categories of bonds.

In its 10-year forecast, PNC expects the Bloomberg US Aggregate Bond Index of Medium-Term Corporate and Government Bonds to return 2.3% per year, while the Bloomberg Global Aggregate ex-US Markets Index will return 2%.

The shining star for PNC in the “multi-asset universe,” Agati says, are alternative investments – private equity, private debt and venture capital. “There are many more opportunities [in alternatives] for significantly additive returns compared to public markets in the future, ”she said.

Penta recently spoke about these opportunities with Agati, who is responsible for the investment policies guiding PNC Private Bank and PNC Private Bank Hawthorn, which works with family offices. It also guides the investment policies of PNC Institutional Asset Management.

“Innovation and growth”

In a slower growing world, Agati says investors focus on companies offering innovation and growth, “and they’re willing to pay for it to some extent,” she said. They will find that most of these opportunities are found in private markets.

While nothing is “cheap” even in private equity, the expectations of returns are higher, mainly because of the premium investors receive for agreeing to lock in their money for longer. Private equity funds generally have a fixed term of 10 years.

Investing in private equity, however, is a multi-year process, as the strongest portfolios are diverse collections of funds with different vintages – that is, when the funds start to put their capital to work. . “Each vintage is unique and diverse compared to the others,” says Agati.

Private equity funds investing in 2022, for example, are likely to be shaped by an increase in mergers and acquisitions, buyouts and specialist firms fueled by “still unprecedented fiscal and monetary support,” the bank wrote. in the first trimester. investment strategy report.

Funds investing this year will also operate against a backdrop of heightened stock market volatility and uneven economic growth, both of which could create pockets of opportunity.

“The ballast that private investment strategies can provide in particularly volatile periods – not being indebted to quarterly profit calls and the drivers of updated forecasts in an uncertain environment – can reassure portfolios,” he said. said Agati.

Life Sciences, Technology and Crypto

For 2022, the private equity themes to be accessed include life sciences, technology and cryptocurrency.

Life sciences are a “real area of ​​innovation and investment” which has been catalyzed by the pandemic. In technology more broadly, there is an innovation boom, particularly linked to the metaverse, or the creation of virtual worlds.

” Technology [sector] has truly been able to use the pandemic to its advantage, stepping away from the pack and continuing to invest and allocate capital and drive innovation, ”Agati said.

This year, more entrepreneurs are also likely to harness blockchain technology to develop new businesses and products, opportunities that will likely be made available through venture capital funds. It “could be a very interesting vintage for some of these exhibitions to take hold,” she says.

Another theme that is not necessarily specific to 2022 as a vintage is impact investing in local communities. “There is a real sense of responsibility and duty among those who are impact oriented or responsible investing to try to find a way to make an impact in their own backyard,” says Agati.

Finding Opportunities in Fixed Income

Emerging markets, which are influenced by variables outside of US Federal Reserve policy, are a potential good for public debt. PNC expects the Bloomberg Emerging Markets Aggregate Bond Index to return 6.2% per annum over the next 10 years.

This is partly due to current valuation levels, but also because the PNC expects low rates globally to stimulate demand for emerging market debt. In addition, high levels of raw materials exported from emerging markets have bolstered government balance sheets in many of these countries, according to outlook for 2022.

“The growth outlook for emerging markets in general is among the brightest in the multi-asset universe,” said Agati.

Since some countries may experience unexpected stresses or shocks, PNC recommends that investors consider investing in this sector through actively managed funds. It’s definitely a place “where savvy active managers can add value to tilt towards or away from benchmark exposures,” she says.

Wealthy investors may also consider private debt funds, which invest in substandard loans, mezzanine finance, and distressed or special-situation funds, according to PNC. That’s because the drivers of private debt aren’t as closely tied to the movement of interest rates as they are in government markets, Agati says.

This means that the cost of capital for borrowers in the private markets is relatively low, providing more opportunities to make deals. “Even though parts of the private market cycle and the business cycle are further from the bottom of the pandemic, we don’t think the private debt cycle is here,” Agati said. “It just creates a better opportunity for investors. ”

But as with emerging debt, investment in private debt is favored by active managers. Part of the reason is that managers can quickly reassess their investments in response to changing conditions.

According to PNC, “private debt allocations could be among the first to benefit from the opportunities that present themselves among rapidly growing industries seeking new sources of capital.”

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