Could rising rates undermine market momentum?
Investment managers and analysts must take account of a range of potential threats and opportunities facing global markets in 2022. Here, Paul Flood, portfolio manager at Newton Investment Management, outlines his biggest concern for the year ahead.
“High and rising energy costs could ultimately cause a strain on the consumer later in the year and result in cost inflation for corporates putting a strain on corporate margins. Rising interest rates could also undermine the high valuations in some sectors leading to a rotation away from highly valued growth companies that have been in vogue. This could be exposed further if the consumer remains robust and fiscal spending provides a boost to the economy resulting in rotation into more cyclical parts of the economy and we see the corporate capex cycle gathering pace, benefitting industrials.
There are several sectors that may face headwinds or tailwinds next year. From a sectorial point of view, consumer goods companies exposed to structural themes, such as energy transition, are likely to benefit, particularly if they have been held back by supply chain issues this year. Some auto manufacturers and suppliers that are leading the transition to electric vehicles are a good example given how their volumes have been impacted this year by the semi-conductor shortage, which could see relief next year alongside pent-up demand for replacement vehicles with the existing average age of vehicles very high.
A sustained level of higher inflation could lead to rising rates which would benefit financials and companies with inflation sensitivity or the ability to pass inflation through, such as some consumer staple companies with strong brands and consolidated industries, such as tobacco companies.”
Paul Flood, portfolio manager, Newton Investment Management
777984 Exp: 23 June 2022