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Global Long-Term Unconstrained: Investment Outlook 2022 - update

Increased geopolitical tension is increasing the risk of an economic slowdown, however, in a world transitioning towards sustainability, exciting opportunities remain for long-term investors.

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Date published
2 May 2022
Zehrid Osmani Head of Global Long-Term Unconstrained
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In terms of outlook on the market, there's a few points to mention. Firstly, on the macroeconomic side, we now believe that we are moving into the slowdown phase of the economic cycle. We see 60-65% probability of such outcome in our view.

We believe that this is as a result of the geopolitical risks in Russia-Ukraine impacting both consumer and business confidence, as well as the higher energy prices, soft commodity prices and hard commodity prices also impacting confidence and leading to potential risk of negative economic momentum.

Furthermore, the China zero tolerance policy on COVID leading to sizable shutdowns of regions and also lockdowns of some sizable cities like Shanghai recently, is also likely to lead to some negative economic momentum in what is the second largest economy in the world.

So for us, the scenario of a slowdown in economic momentum is leading us to see the economic cycle as moving to slow down. We think the probability of a stagflation remains low but is rising. So we've increased probability from less than 5% at the start of the year to 10-15% probability, with the highest risk of such being in Europe, given the proximity to the Ukraine-Russia crisis.

In a period of slowdown in economic cycle, the styles that typically have performed well for investors have been quality growth and momentum, and the latter one being important, given that in our view, the earnings outlook in the market is deteriorating.

We are looking at a year, 2022, where consensus has been sitting at about 7% earnings growth year on year at the global level. We believe this is at risk of downgrades, both from companies exiting Russia, which could lead to typically about 1-1.5% downgrades on revenues and profits.

But also in terms of the weaker consumer and business confidence that we predict, which could lead to downward revision to the top line. And finally, the higher inflationary pressures leading to input cost inflation, putting pressures on corporate margins and leading to further downgrades.

So this could be a year that will turn from a low growth year into a potentially no growth year. We have downgraded our estimates on the outlook for global earnings growth to +4% from +7% previously. In this environment, we want to focus on companies that offer consistent growth, structural growth prospects in the medium to long-term as well as companies that have pricing power in order to protect their margins in a period of stronger inflation that is also longer lasting.

On that inflation point, the tricky aspect in terms of outlook is that given the inflationary pressures, we believe monetary policies will need to continue on their path towards normalisation and will need to continue hiking interest rates. And this could be a more sizable hikes and could be more longer lasting as well. As a result, this could lead to a fear in the market of the economy moving into recession. At this stage, this is not our central scenario.

We think there's going to be a slowdown, which is something that will remain a bull-bear debate for the remainder of the year. Really what this is highlighting, is that 2022 is going to turn into a year with very broad potential macroeconomic outcomes ranging from recession, stagflation, slowdown or a return to expansion if things normalise, and therefore that bull-bear debate is going to be very active throughout the year.

In this environment, we continue to focus on the eight term opportunities that we have highlighted in the past. From the thematic point of view, first of all, green and alternative energy, which has in itself been accelerated as a result of European countries focus on trying to reduce or exit their dependence on Russian energy supplies, electric transportation, both high speed railways and electric vehicles as a way to continue to decarbonise economies. 5G telephony, as a way to increase productivity in countries. And, healthcare infrastructure, given the need to upgrade healthcare post the COVID crisis, additional opportunities to us exist in cloud computing and cybersecurity, robotics and automation and the metaverse and quantum computing in particular.

Thank you for listening. It's Zehrid Osmani, Head of Global Long-Term Unconstrained Equities at Martin Currie.

*Source: FactSet as at 31 March 2022.