Future Returns: Resetting Investment Expectations for 2022

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While economies around the world are strong, higher valuations for public companies and the prospect of a hike in interest rates mean investors are re-setting their expectations for returns.

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“This next phase of the economic cycle is certainly going to be slower than the record-breaking rally and pivot in the cycle that we have seen over the past two years,” says Amanda Agati, chief investment officer at PNC Financial Services Asset Management Group. ” “We think this is going to be a really tough slog.”

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Keep in mind, this more challenging outlook comes after a year when the S&P 500 index rose nearly 27%, according to Dow Jones Markets data, over a three-year period when the broad-market index was up more than 90%.

For 2022, the S&P 500 is projected to gain 9%, which would certainly be considered a “home run for large-cap home equities” in a non-pandemic environment, Agati says. But it is definitely less as compared to the last three years.

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When it comes to public debt, PNC becomes even more cautious. While the bank expects a “lower-for-long” interest rate environment to prevail for the next several years, its economists expect a global rate hike in 2022, putting price pressure on most categories of bonds. .

In its 10-year forecast, PNC predicted that the Businesshala US Aggregate Bond Index of intermediate-term corporate and government bonds would return 2.3% annually, while the Businesshala Global Aggregate Ex-US Market Index would return 2%.

The bright star for PNC in the “multi-asset universe,” Agati says, is alternative investments—private equity, private debt and venture capital. “There are many opportunities [in alternatives] for meaningfully additive returns relative to the public markets,” she says.

penta recently spoke about these opportunities with Agati, who is responsible for the investment policies guiding PNC Private Bank and PNC Private Bank Hawthorne, who work with family offices. She also guides investment policies for PNC Institutional Asset Management.

‘Innovation and Development’

In a slow-growing world, Agati says investors are focusing on companies that offer innovation and growth, “and to an extent they are willing to pay for it,” she says. They will find that most of these opportunities are in private markets.

While nothing is “table-pounding cheap”, even in private equity, return expectations are high, primarily due to premium investors agreeing to lock in their money for a long period of time. Is obtained. Private-equity funds typically have fixed terms of 10 years.

However, investing in private equity is a multi-year process, as the strongest portfolio is a diversified collection of funds with different old years, meaning the date the funds start operating. “Each vintage year is unique and diverse relative to the others,” Agati says.

For example, private-equity funds investing in 2022 are likely to be driven by increased mergers and acquisitions, buyouts, and “still unprecedented financial and monetary support” by special-purpose companies, the bank wrote in the first quarter. Was. Investment strategy report.

Funds investing this year will also work against the backdrop of heightened volatility in the stock market and uneven economic growth – both of which can create opportunities.

“The private-investment strategy can bring in particularly volatile times — quarterly earnings calls being ignored and updating guidance in an uncertain backdrop may provide comfort in the driver-portfolio,” says Agati. ”

Life Science, Technology, and Crypto

For 2022, accessible private equity themes include life science, technology, and cryptocurrencies.

The life sciences are a “real area of ​​innovation and investment” catalyzed by the pandemic. There has been a boom in innovation in technology more broadly, particularly relating to the creation of the metaverse, or virtual world.

“Technique” [sector] has really been able to use the pandemic to its advantage, pulling away from the pack, and continuing to invest and allocate capital and foster innovation,” says Agati.

This year more entrepreneurs are also likely to use blockchain technology to develop new companies and products, opportunities that will be made available through venture-capital funds. “It could be a very interesting vintage year to capture some of that exposure,” she says.

Another theme that is not necessarily as specific as an old year for 2022 is the impact of investments in local communities. “There’s this real domestic sense of responsibility and duty for those who are impact-oriented or responsible investment-oriented, who try to find a way to make an impact in their own backyards,” says Agati.

Finding Opportunities in Fixed Income

A potential bright spot in public debt are emerging markets, which are driven by variables outside US Federal Reserve policy. PNC expects the Businesshala Emerging Markets Aggregate Bond Index to deliver a 6.2% annualized return over the next 10 years.

This is partly due to current valuation levels, but also because PNC expects lower rates globally to drive demand for emerging market debt. In addition, higher levels of exports from emerging markets have strengthened government balance sheets in many of these countries as they approach 2022.

“Generally the growth outlook for emerging markets is one of the brightest in the multi-asset universe,” says Agati.

Because individual countries can experience unexpected stress or setbacks, PNC recommends that investors consider investing in the region through actively managed funds. This is certainly one place “where shrewd proactive managers can add value by leaning toward or away from benchmark exposure,” she says.

According to PNC, wealthy investors may also consider private debt funds, which invest in under-investment-grade debt, mezzanine funding, and distressed or special-position funds. That’s because the drivers of privately issued loans are not as linked to fluctuations in interest rates as in the public markets, Agatti says.

This means the cost of capital for borrowers in the private markets is relatively low, providing more runway to bargain. “Even though some parts of the private market cycle and the economic cycle are ahead of the bottom of the pandemic, we do not think the private credit cycle is,” Agati says. “It just creates another interesting opportunity for investors.”

But with emerging market lending, investment in private debt is increased by active managers. This is partly because managers can quickly reevaluate their investments in response to changing circumstances.

According to PNC, “the allocation for private loans may be one of the first to benefit from the opportunities arising among rapidly growing industries looking for new sources of capital.”

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