Barry Norris, CEO and CIO, Manager, VT Argonaut Absolute Return Fund, Argonaut Capital
Omicron is likely to mark the end of the pandemic, with an overall mortality rate lower than influenza, even for the unvaccinated, which means mass vaccination programmes will likely also be quietly phased out. Countries such as China that continue to follow “Zero Covid” policies will exacerbate ongoing global supply chain woes. Inflation in 2022 will be higher overall than 2021 – averaging above 5 per cent rather than the 2.5 per cent predicted by the Fed.
Demand for oil should see a strong recovery in 2022, which oil producers will struggle to meet. The cost of energy decarbonisation will also become clear. Switching off fossil fuels for unreliable renewables has already resulted in structurally higher power prices which has not only hit the consumer, but is rendering much of Europe’s heavy industry uncompetitive. Higher food and energy prices will also result in extreme social and political unrest in emerging markets. The effects of this structural energy shock – as with OPEC in the 1970s – will have profound negative consequences.
The impact of more persistent inflation on financial markets is likely to be a Fed hiking cycle that marks the end of an era of free cost of capital. We see an abundance of short opportunities in “story stocks”, often with no sustainable competitive advantages, no valuation support, instead only some vague hope that they represent the “future”, which is subject to a high degree of risk and with the prospect of a rising discount rate, this possibility will now be weighed by a far less patient market.
After more than a decade long boom in long duration equities and bonds, our strategy offers investors a unique and valuable hedge on the risk of a 1970s redux.
Jeff Landle, Chief Investment Officer, Little Harbor Advisors
One way to describe equity investments since the brief market meltdown in 2020, and as we look forward to 2022, is as follows: imagine you are at a wonderful party, having a great time and contemplating when you should leave. Too early, and you’ve missed a great deal of fun. Too late, and you run the risk of over imbibing, no Ubers or worse.
Over the last couple of years, equity investments have been akin to that amazing party. There are signs that it is getting later in the evening, but no one really knows for sure when the right moment is to bid adieu and head back home.
So, how does one determine when it is time to leave the party?
Probably when it appears everyone else is about to do the same thing, but before the big rush for the exits. For equity markets, VIX instruments are a good proxy for people getting ready to leave. One could think of these indicators as the ‘Ubers’ for investors. Uber rides are priced relative to proximate demand – as more people are looking for rides, the price rises. The same could be said for VIX instruments. Institutional hedgers are like the Uber riders: the more they seek insurance (read VIX options and futures), the higher the price of the protection.
By understanding how that demand operates, it may be possible to divine how investors may react and have insight into when it’s time to arrange for a ride home before the departure rush becomes overwhelming. Given that the uncertainty around the economic and global environments is increasing, tactical exposure strategies driven by information gleaned from VIX pricing are one option to enjoy the party without worrying about overstaying one’s welcome.
Remember, the secret to terminal wealth-maximisation is not necessarily making more on the way up, but losing less on the way down and letting compounding work its magic.
Karl-Mikael Syding, Portfolio Manager, Antiloop Hedge
The decades-long growth/value divide looks like it could narrow during 2022, or could passive index flows really continue to make the gap even more absurd? Both a continuation and a reversal alike have the potential to wreak havoc with equity hedge fund returns. Antiloop’s equity team currently has a positive view on defensives – tobacco, retail banks, low-cost retail – versus technology and cyclicals; as well as preferring Chinese growth stocks, like Alibaba, to US counterparties, like Amazon.
The Fed’s Powell already seems to be backpedalling from his hawkish stance – although admittedly questioned to begin with. Were he to decisively reverse course and halt QE tapering or postpone rate hikes, the hoped-for growth/ value correction would probably be put down before it even got going. Such a move could wrong-foot Antiloop’s growth-sceptical equity strategy, and probably many other equity hedge funds as well.
Central banks will eventually get price inflation gauges under control, through careful tightening. Rate hikes combined with lingering supply shock induced inflation could fuel investor rotation into, eg, retail banks, from high-multiple growth stocks with questionable paths to profitability such as Robinhood, Peloton, Uber, DoorDash and AMC.
The price for such tightening would be lower growth, further exacerbated by Omicron shutdowns – even if the latter (informed by the Swedish laissez-faire example) turn out to be more limited than the initial pandemic related shutdowns.
Only 0.5 per cent of US vehicles are fully electrical. Many manufacturers are only now bringing BEVs to market, thus setting the stage for explosive growth. One consequence is increased demand for materials, like graphite, nickel, cobalt and lithium, as well as copper for electrical wiring. The focus on sustainability should further increase interest in uranium, and REEs used in motors and turbines. Renault, GM and Honda should benefit too.
Edmund Luzine, CEO, Adirondack Capital
We see tremendous opportunities across the global emerging markets equity sector in 2022, along with substantial headwinds from large risks on the horizon.
Those risks include an increase in interest rates in the US, high inflation in major global economies, continued tension with China, and Russian aggression directed at Ukraine that will impact energy and related commodities markets.
There are excellent opportunities for value investors in select sectors and nations in the developing world. The 2021 tech crackdown in China will continue to provide smart value investors and traders with alpha generating targets, and economic activity will increase in China after the Year of the Tiger Lunar New Year and post-Olympic travel, as the nation opens up to the rest of the world.
The return to the office (RTO) trade combined with a continued re-opening of the global economy will spur demand, driven by consumers and global travel. Record air travel at Miami International Airport in November is a leading indicator of future trends in 2022.
On a macro level, we have very few concerns over Covid-19 and the pandemic. The increase in deaths in the US was slightly higher than a normal flu season, and economic activity in red states will continue to be robust.
There are also select opportunities in the infrastructure sector which supports electric vehicles – charging stations, electrical transmission components, batteries, other storage devices, and select elements, such as lithium, cobalt, and others.
We also see value in the re-shoring of trade. As the world recovers and opens up from the pandemic, we expect supply chains to continue to shift out of China – to low-cost areas in Asia, Africa, and especially Mexico, next to America’s economic engine.
Our top picks for 2022 and beyond are: the newly formed Canadian Pacific Kansas City Southern Railroad; Naspers of South Africa and its holdings of China’s Tencent; Teck; Teva Pharmaceuticals; Apache and its significant prospects in Suriname; Maxar Technologies; Alibaba; and Yum China.
Finally, we have seen demand from investors for more bespoke products – separately managed accounts with strict ESG requirements. We also see institutional investors seeking an increase in the diversity of fund managers from select minority and veteran-owned asset management firms.
We see next year as very rewarding for patient, but aggressive and intelligent investors. 2022 is the Year of the Tiger in Asia. We are already on the prowl!
David Amaryan, Founder and CEO, Balchug Capital
The prominent risks we have identified, include inflation, Covid-19, geopolitics, supply chain problems, labour shortages, slowing global growth, slowing corporate earnings and diminishing equity returns.
We believe that inflation can create a major headwind for markets globally in 2022. At the beginning of the year, the inflation forecast was 2 per cent. Now, it’s around 7 per cent, and it can be higher. It is broad-based and is probably not as “transitory” as some people think. Keeping inflation under control is one of the Fed’s main priorities. In 2022, it will be more aggressive in ending its asset- buying programme and raising rates, which will slow down global growth, with all the implications that come with it.
Covid-19 will continue to be on everyone’s radar. Today, we are worried about the Omicron variant, tomorrow other more deadly variants might emerge, and this uncertainty will continue to create volatility in the markets. We are a bit more optimistic than most other people. Unless something extraordinary happens and we get hit with an extremely contagious and deadly variant, we should be able to deal with new outbreaks faster and more effectively than before. This is not March 2020. We are more prepared than ever before. We already have a vaccine and know how to change it quickly to protect against new variants. Hence, we see fewer chances of lockdowns. Nonetheless, Covid-19 can cause wild moves in the markets and increase volatility in general.
In terms of geopolitics, Russia, Ukraine, China and the West’s response will be the focus in 2022. We are generally optimistic and believe that geopolitical tensions will ease in 2022. We do not expect the Russia/ Ukraine conflict to escalate to actual war – that is nonsense.
Volatility creates opportunities. Hence, all the above-mentioned risks can create opportunities in 2022. The ability to differentiate real systemic risks from market overreactions will be key. We generally expect muted returns in the broad market. Rising interest rates will put pressure on growth stocks, especially the ones with no earnings, but extremely high valuations (and there are plenty of those).
In 2022, we will be even more selective and focus on quality names, events and commodities. For this year, we like: value, some growth sectors (such as EVs), Biotech (where we expect to see continuing consolidation), China, Russia (as tensions ease, we predict lots of opportunities and events), commodities and crypto.
Emmet Peppers, Founder and Portfolio Manager and Matt Smith, Portfolio Manager, Good Soil Investment Management
The past two years saw an extreme uptick in valuations for growth companies, yet we believe investors have had a difficult time identifying which companies will be truly transformative in the long term. Many companies with very little differentiating technology or strategies saw stratospheric valuation multiples, while clear leaders, such as Tesla, are still viewed through a skeptical lens by many of our hedge fund peers.
This landscape sets up an extreme disparity in outcomes among companies which may appear on paper to be peers; many will fail, and a few will be huge winners. In 2022, we believe the market will continue to better differentiate between these two types of companies. The SPAC craze will almost certainly cool, and many companies that listed this way are likely to see their valuations cut.
Macro uncertainty around Covid-19, interest rates and inflation will continue to drive skittishness in equity markets. We believe that, even if these issues cause markets in general to weaken, significant return potential still exists for investors who understand the huge technological disruptions which are poised to unfold this decade.
At Good Soil, we believe this dynamic will create huge asymmetric opportunities, both on the long and short side. Alpha generation will be achieved by those investors who have the information advantage in identifying winners and losers in this dynamic.
