Multi asset portfolios to benefit from earnings growth


MEDIA RELEASE: Investor expectations for returns remain high with research showing that Australian investors expect returns of 10.6 per cent per annum over the next five years, according to Schroders. However while this is in line with returns that have been achieved over the past five years, investors shouldn’t expect more of the same in 2022, says Schroders Australian Head of fixed income and multi asset, Simon Doyle.

“While our return projections for equities are moderate – in the mid to low single digits – in multi-asset we have been cautiously adding equities to our portfolios in recent months, and there are some good reasons why.

“We consider equities to be expensive but as economies have opened up on the back of vaccine rollouts and stimulus packages, we have also seen a huge rebound in earnings globally. We expect decent earnings will continue into 2022, and this will take some pressure off valuations.”

Mr Doyle added that in many cases equities are no more expensive than any other asset class – be it credit, sovereign markets, or housing – but that there was some upside to equities that was not apparent in other asset classes.

“If you compare equities to credit for instance, one of the challenges of credit is that there is not a lot of upside left – the recovery has already been priced into the credit spread. If equity markets were to fall, credit would suffer. But if equities do rally there is really not a lot of room for credit to do the same.

“In this environment, credit has the downside and not the upside, while equities – even though they are still expensive – can still offer some upside.”

Mr Doyle said he is cautious but not overly so about any major changes in policy settings in 2022.

“We do expect to see policy shifting at the margin and this may lead to some jitters in markets, but it is unlikely that central banks are going to adopt policies that deliberately derail risk pricing. So while it is likely we will see an adjustment, we believe it will be a gentle adjustment, and it will still provide support to markets.

“If profits are rising, if policy settings are broadly still supportive, that is not a bad cyclical backdrop for equities,” he said.

However he warned that there are some ridiculously overpriced sectors of the equity market.

“There are examples in technology and healthcare where these companies will never earn enough to support their prices. But there are also some high quality segments of the market that have been left behind, and they have the ability to benefit from the reopening of the economy.

“As a result, at the margin, we are favouring equities in our portfolio. We still think 2022 will be a bumpy ride but we think equities will ride it out OK.”

As far as debt markets are concerned, in the context of a multi-asset portfolio, Mr Doyle said the key will be to go broad and deep.

“A well-diversified, carefully targeted exposure to debt investments will certainly compensate for any risk that may come through interest rate rises.”

Mr Doyle said he sees opportunities in Asian credit which has been buffeted by concerns about Chinese property.

“All Asian markets have suffered guilt by association and many corporates have seen a significant widening of credit spreads. But there are good opportunities there, because a lot of that bad news is priced in, and in many cases perhaps have even been overpriced.

“Private markets are another area of interest, and there is the opportunity to provide a direct line of capital to borrowers at attractive rates of return. Whether it is the private loan market, or the provision of mortgage finance to commercial real estate developers – there are some pretty attractive premiums on offer,” Mr Doyle said.

Meanwhile, Ella Reilly, sustainability investment director at Schroders, said a key trend expected to develop in 2022 will be the focus by investors on where they can direct their capital in sustainable ways.

“We have just had COP26 with its climate change focus, and this will continue to be a key ESG investment issue for many investors in 2022.

“Closely intertwined with climate is natural capital and the effects that a warming climate are having on biodiversity. There will be an increased focus on preserving nature and investors will be looking at ways they can participate in that theme, to have a more positive impact from an environmental stance,” said Ms Reilly.

She said it will be important for investors to understand the role they can play in directing their capital to sustainable options and products.

“But this doesn’t necessarily mean that divestment is the best approach to sustainable investing.

“It’s quite easy to divest, without thinking through what divestment really means. One of the things that will be important for investors in 2022 will be to develop an understanding of how they can impact outcomes. But it will also be important think about what outcomes they are trying to impact.

“This may mean supporting high quality low emissions businesses that are on paths to significant future improvement, rather than just taking the easy route of very aggressive divestment.”

Mr Doyle echoed this view. “We are increasingly becoming involved in corporate engagement. As an active manager, engagement is one of the most effective ways we can influence outcomes – and probably a lot more effectively than divestment,” he said.

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