Quoniam Outlook 2022: Selective approach is the key to investment success

“We remain cautiously optimistic,” summarizes Quoniam CIO Thomas Kieselstein. He is particularly positive about the continued high level of liquidity that needs to be invested. “We have already seen significant flows into global equity markets, with inflows this year alone being four to five times higher than in the previous 25 years,” says Kieselstein. It is also worth noting that private investors are an important part of this development and have become much more important in recent years. However, segments such as growth stocks or real estate have benefited extremely from cheap money in recent years.

Monetary policy and inflation 

Nevertheless, there are two risks in particular that are currently concerning the capital markets. Will the central banks’ change of strategy go smoothly? And: Will inflation develop into runaway inflation, i.e. high inflation over a longer period of time?

For Dr. Harald Henke, Head of Fixed Income at Quoniam, the current uncertainty is high. The first steps of the taper have already been taken, to which the bond market has reacted rather sceptically with flatter curves.

The rise in inflation has surprised the markets and the forecasters’ consensus after years of low inflation rates. “But inflation expectations have peaked, and the highest point seems to have been passed,” Henke comments, referring to the recent decline in break-even inflation rates. “So the bond market does not see the inflation threat so critically.”

Consequences for the investment strategy

Bonds

For the bond markets, the development means a heterogeneous picture. Henke outlines two scenarios: “If inflation normalises, US dollar corporate bonds in particular look attractive,” says Henke. Compared with ten-year Bunds, which offer a minimally positive total return, investment-grade corporates in US dollars can expect a total return of around 2.5% – including currency hedging. Even IG-Euro corporate bonds with an expected total return of 1 to 1.5 percent could not keep up.

“However, if investors are worried about rising inflation, they should reduce the interest rate duration,” Henke said. The spread component, on the other hand, could work well in this environment. “In an inflation scenario, there is more to be said for spreads than duration,” the fixed-income expert explains. The reason: spreads are meant to compensate for a company’s risk. And when inflation is high, the real value of debt falls, meaning the debt is much more sustainable for a company. In addition, many companies can pass the cost on to consumers.

Henke considers credit risks in general to be manageable. According to the expert, the reasons for this are “the central bank put, the low defaults and a positive outlook”. For some quarters now, there have been significantly more upgrades than downgrades by the rating agencies.

Equities 

“Equities remain attractive, they are still a good choice in the long term. But total returns will probably be lower than in the past,” says Dr. Volker Flögel, Head of Equities & Multi-Asset, summing up the equity view. The rally in US stocks, especially growth stocks, which had dominated the markets in recent years, is coming to an end. That’s another reason Flögel advised investors to be cautious about passive indexes. “There is in part an enormous concentration risk in some indices.” In the case of the S&P 500, for example, the top five stocks were recently responsible for around 25 percent of the index performance.

The expert currently favours equities from the emerging markets and Europe in particular. The expected risk premiums and earnings growth are attractive here, and the weak growth in these two regions has been overcome. “If you have a bit of courage, you will find attractive and well-valued investment opportunities in the emerging markets in particular.”

According to Flögel, factor strategies can also be a good alternative for equity investors. While value and momentum show their strength in cycles of rising inflation, a look at history shows that a multi-factor strategy, i.e. a mix of all styles, is able to outperform in all inflationary phases, says the Head of Equities & Multi Asset.