How quickly can the world readjust, coming out of a global pandemic? In this video, Portfolio Manager Luke Newman highlights some of the drivers that will determine the prospects for absolute return in 2022.
We expect to see a repeated oscillation between value and growth as rising demand meets ongoing supply chain issues, economies seek to normalise, and stimulus measures continue to roll off.
The UK market currently looks attractively priced, in absolute terms, despite a huge surge in merger & acquisition activity since the conclusion of the Brexit saga.
We see absolute return as a useful diversifier for investors following a period of exceptional returns in financial markets from both equities and bonds.
The outlook for equity long/short looking forward into 2022 will be similar in terms of the drivers to most asset classes. This continuation of a focus on the rate of recovery in terms of demand as stimulus measures begin to roll off and economies get back to normal, married with a focus on supply chains. How quickly can the world re-adjust coming out of a global pandemic.
This in turn will lead to a repeated oscillation between value and growth trends, and when we look forward towards the end of the first quarter in 2022, the base effects and the rate of change analysis that we have done means it is very hard for upside surprise in terms of GDP and inflation. So, we are looking forward at that point to maybe being an opportunity to tilt the portfolio back towards higher quality, high-margin compounded growth-type companies within our long book, and maybe looking at some of the cyclicals on the short [side] again.
The other area I would highlight would be the UK market. We invest across the US, and most of Western Europe, but the UK market still looks cheap in absolute terms. We have seen a big change in terms of a huge M&A cycle that has begun since the culmination of the Brexit talks, so the corporate world [is] reassured that there is no political trapdoor to walk into. But public markets are lagging. So after reversing out long-held net short position to UK domestic assets a year ago we have continued to maintain a prominent long exposure to UK assets.
The biggest risk within our market I would say is liquidity. It is one of the reasons why we always focus on large- and mega-cap companies within developed markets. So, we don’t move down the market cap scale. We don’t move into less liquid regions. The strategy and our ability to deliver a consistent, stable absolute return relies on our ability to be flexible. None of us know what is coming round the corner. None of us know where the next pandemic or political shock is going to come from. So having the flexibility through liquid assets to be able to protect initially, and act as a shock absorber, and protect capital to the downside, as well as moving to take advantage of opportunities is absolutely crucial. So anything that affects liquidity, and there have been some hints and concerns over the last 18 months, in areas of the bond market and indeed the equity market, so that is an area we watch very, very closely.
If you are considering an investment within absolute return as a diversifying asset class, I would say [we have had] a decade or so of an exceptional period in global markets, where we have had equities (particularly US equities) and the bond market correlating (that’s very unusual – great on the way up). But when we are looking at a sustained inflationary response and we are looking at a reversal of some of the very loose monetary policy we have had in place over a number of years now, actually the risks in terms of fixed income in particular not acting as protecting shock absorber within your portfolio, must be elevated.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
The Janus Henderson Fund (the “Fund”) is a Luxembourg SICAV incorporated on 26 September 2000, managed by Henderson Management S.A. Henderson Management SA may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
The Fund may use derivatives towards the aim of achieving its investment objective. This can result in 'leverage', which can magnify an investment outcome and gains or losses to the Fund may be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
When the Fund, or a hedged share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency, the hedging strategy itself may create a positive or negative impact to the value of the Fund due to differences in short-term interest rates between the currencies.
Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
The Fund involves a high level of buying and selling activity and as such will incur a higher level of transaction costs than a fund that trades less frequently. These transaction costs are in addition to the Fund's Ongoing Charges.
Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.