A Dundee finance firm has highlighted supply chain disruption, inflation and rising interest rates as the main issues for 2022.
Alliance Trust say those will be the main issues facing the fund managers which select stocks for the firm’s global equity portfolio.
The measure of any portfolio’s strength, however, is in how it is set up to deal with these challenges.
Andrew Wellington, chief investment officer at Lyrical, one of the Alliance Trust fund managers, said demand has returned as the global economy has reopened.
He added: “Companies are having a difficult time sourcing everything they need to meet that demand.
“With those supply shortages we have seen prices rise, driving inflation.
“The supply chain and inflation issues are difficult challenges for any management team.
“For most of the companies in our portfolio, the net result of these challenges has been positive to the bottom line, with higher prices more than offsetting lower volumes and increased costs.”
Has global economy recovered from Covid?
Black Creek Investment Management founder and president Bill Kanko, another fund manager, said the global economy has recovered from the shutdowns imposed by Covid-19.
Mr Kanko said it has done so facing shortages in various products and hiccups in supply chains.
“Material costs have risen and labour costs seem set to rise as well,” he said.
“Current nominal interest rates are well below the inflation numbers.
“A key challenge will be to determine whether this jump in prices is cyclical and temporary or ongoing.
“Higher interest rates would be negative for both bond and equity markets.
“Low interest rates have also caused bubbles to appear in some sectors of the market.
“As rates rise, these bubbles may burst.”
Meanwhile Hugh Sergeant at River and Mercantile is sanguine about the growth equity bubble bursting.
While acknowledging the challenge of interest rate rises, as monetary policy starts on a path to normalisation, he said: “This could reduce the return to equities next year.
“It should be positive for the value equities that we invest in.
“Rising rates are more supportive of shorter duration value stocks than longer duration growth and quality investments.”
Value will also come from investment in companies which have the pricing power to pass on any increased costs.
Potential for ‘overreaction’ to create volatile market in 2022
Michael Sramek, senior portfolio manager and managing director at Sands Capital, believes that technology and demographics are long-term disinflationary forces.
He said there could be an “overreaction” by the Federal Reserve similar to 2018 when it raised rates.
Mr Sramek added: “This could result in short-term equity market volatility. It should not erode the long-term investment cases for our companies.
“We believe competition, saturation, and regulation are the biggest risks to monitor and the businesses remain in good shape.”
Alliance Trust’s dividend payments have grown for more than 50 years.