Happy New Year, everyone! As you may recall, our overall macro theme for 2021 was “The Reopening of the Global Economy.” The theme proved true as 2021 was a year marked by a sharp uptick in earnings and economic growth as the economy began its reopening process from the COVID-19 pandemic shutdown. 2021 was also a year that saw significant stock market returns (specifically in the U.S.), excessive valuations, record-setting inflation, supply chain issues, labor supply shortages, a patient Federal Reserve, and two new variants of COVID-19.

We see the theme for 2022 as being “Still Growing but yet Slowing” as it relates to both economic and stock market growth. This theme may ultimately prove to be the case for inflation as well as the New Year progresses. In this regard, below are our “Top 10 Investment Themes for 2022” for your review and consideration, remembering that while 2021 turned out to be far less volatile than 2020, short terms bouts of volatility may start to pick up again in 2022, as we saw late in 2021.

Investing For A Rising Rate Environment 

Based on the Federal Reserve’s pivot at the end of 2021, it appears as though they may now be adopting a more hawkish stance to removing the stimulus provided during the COVID-19 pandemic while helping to combat non-transitory areas of inflation. The “Dot Plot” chart that was released after their December 2021 FOMC meeting shows the median forecast of FOMC voting members projecting three rate hikes of 25 Bp each in 2022, another three rate hikes of 25 Bp each in 2023, and two additional rate hikes of 25 Bp each in 2024. While it seems unlikely that there will be three rate hikes in 2022 at this time, and those that do occur will likely occur no earlier than the 2nd quarter, it is fair to conclude that we are entering a rising rate environment. Asset classes that have historically performed well during periods of rising interest rates include, but are not necessarily limited to, equities, high yield bonds, precious metal miners, and convertible bonds.

The E-commerce Growth Story Continues

The transition from traditional, in-person retail sales to online sales was well underway before the COVID-19 pandemic due, in large part, to the speed and convenience of shopping online. This transition has only accelerated through the pandemic. Consider that E-commerce sales accounted for just 4.2% of total U.S. retail sales in Q1 2010 and recently accounted for over 13% in Q3 2021, according to Statista. It is also estimated that a record $207 billion will be spent online in the U.S. during the 2021 holiday shopping season. Additionally, it is forecasted that E-commerce will account for nearly 22% of all retail sales globally by the end of 2024. As a result, it has become abundantly clear that E-commerce is not just a fad or a seasonal story but rather represents an ongoing growth narrative with many associated investment opportunities. In our view, these opportunities exist for traditional E-tailers and other companies that derive revenues from their role in the overall E-commerce ecosystem, such as payment providers, Industrial REITs, and air freight & logistics firms.

Financials Positioned To Perform As Rates Rise And The Economy Expands

The banking industry maintains a unique and prominent position within the U.S. economy. This critical component of the U.S. economy, notably the smaller-cap regional banks and mortgage and thrift institutions, is also worthy of investment consideration as technology transforms the banking industry, enhancing operational efficiencies and profitability. In addition, changing consumer preferences allow best-in-breed institutions to adapt, grow, and ultimately succeed. These ongoing trends in technology advances and consumer preferences will likely keep industry consolidation at an elevated level throughout 2022, following a year that saw the return of robust M&A activity within the Financial Sector in 2021. Finally, Financials historically have strong performance in a rising rate environment when economies are expanding.

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Sustainable Impact Investing Attracts More Retail Investors

According to the 2020 trends report from the Forum for Sustainable and Responsible Investment, sustainably invested assets under management, both institutional and retail, increased by 42% between 2018-2020, and represented 33% of all U.S. assets under management at the end of 2020. However, most of these assets are associated with institutional investors. We believe that sustainable impact investing strategies will attract more and more attention from retail investors in 2022 and beyond, as retail investors prioritize whether companies treat their employees well, give back to their communities, and are good stewards of the environment. In this regard, it is important to appreciate that sustainable impact investing allows investors the opportunity to incorporate the Environmental, Social, and Governance (ESG) ratings of a company with the investment merits of the company’s stock into the portfolio selection process.

Continued Demand For The Tax-Free Income Of Municipal Bonds

According to data from Bloomberg, 21% of outstanding tax-exempt debt will mature or be called by the end of 2024 and 31% by the end of 2026. Given the many budget constraints of municipalities across the country and the current outlook for a rising rate environment ahead, it is hard to imagine that there will be enough new supply to offset all the matured or called municipal bonds. Factor in the additional increased demand anticipated for the tax-free income associated with municipal bonds if/when personal income tax rates are raised, and the existing supply/demand imbalance for municipal bonds will likely continue and perhaps even widen.

Big Pharma (And The World) Needs Innovative Healthcare Solutions From Biotech

The COVID-19 pandemic served as a painful reminder of the need for innovative healthcare solutions worldwide, not just to treat the coronavirus but also to treat, and in certain cases cure, other rare and chronic diseases plaguing society. These innovative solutions typically come from smaller-cap Biotech firms, which are often pursued as take-over targets by larger-cap pharmaceutical companies. In 2019, there was a record $254 billion in Biotech M&A activity, according to HBM Partners. These acquisitions slowed in 2020 when the pandemic hit and remained sluggish in 2021. In fact, according to BioPharma Dive, the second quarter of 2021 marked a five-year low in both the value and number of biopharma transactions. As things return more to normal in 2022, perhaps Biotech M&A activity will as well. PwC certainly thinks that will be the case as they are forecasting exceptional M&A activity in 2022, potentially reaching as high as $350 – $400 billion in deal activity, driven by large pharmaceuticals desires to deploy capital by acquiring solutions in the areas of oncology as well as cell and gene therapy.

Technological Innovation Remains Critical For An Evolving Society

As the world continues to move through the COVID-19 pandemic, society will likely continue to communicate, work, shop, and educate more remotely than ever before. Technology will continue to assist with this societal transformation. Specifically, revolutionary technologies, such as artificial intelligence, robotics, blockchain, cybersecurity, and even 5G, will be of paramount importance to individuals, corporations, and governments. Companies across multiple market capitalizations that are proven innovators and deliver or utilize these types of revolutionary technologies most effectively will best be able to adapt to our ever-evolving society.

Don’t Discount The Potential Of Dividend-paying Stocks

According to the Hartford Funds, dividend income’s contribution to the total return of the S&P 500 Index averaged 41% from 1930–2020. During certain time periods, the contribution percentage was even greater, such as the decade of the 1970s (a decade when total returns were low by historical standards) when dividends accounted for 73% of the total return of the S&P 500. After appreciating the importance of dividends, the next step is to find the stocks of large-cap, mid-cap, and small-cap domestic, as well as certain international (considering developed market and emerging market countries) companies across the globe with competitive advantages, future earnings growth, and stock price appreciation potential, strong balance sheets, and a history of increasing their dividends and less likely to cut or suspend their dividends.

Consider Preferred For Income Potential

A security type that income-oriented investors consistently seem to forget about is preferred securities. As a reminder, preferred securities represent ownership in a corporation and have both bond and stock-like features. Often referred to as “preferred stocks,” preferred usually pay a fixed income, have a par value, hold a credit rating, and trade on a major exchange. Perhaps most important to income-oriented investors, preferreds also have dividends paid out before dividends to common shareholders and typically have a higher stated dividend payout than the corporation’s common shares – and even the company’s bonds in some cases. In some instances, preferred securities provide qualified tax treatment of their dividends, creating an additional benefit to income-seeking investors. If the Federal Reserve only raises interest rates between 0.50% – 0.75% in 2022, investors will remain challenged to find attractive potential sources of income. One such source of income potential in 2022, in our view, can be found in a diversified portfolio of preferred securities.

Infrastructure Spending May Help Propel Growth To Value Rotation

Traditional infrastructure spending in the areas of surface transportation, broadband access, and electrical grid upgrades were all part of the infrastructure spending bill that was passed and signed into law in 2021. These targeted infrastructure upgrade areas lead to potential equities and fixed income investment opportunities as the spending commences in 2022. On the equities front, Communication Services, Energy, Industrials, Materials, and utility sectors seem poised to benefit from the expenditures. These value-oriented, cyclical sectors should also help with the Growth  Value Rotation that started early in 2021, slowed in the middle of the year, and then gained some new momentum at the end of the year heading into 2022.

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