Climate change and disruptive technologies will deliver the biggest returns for equity investors over the next decade, according to global wealth manager UBS.
Over the next 10 years, investors should seek out opportunities in the net-zero carbon transition and the “ABC” of disruptive technologies — artificial intelligence, big data and cybersecurity, the bank said, as it delivered its global investment outlook for the year ahead.
“Attaining net-zero is expected to require global investment in renewables of $50 trillion for each decade until 2050, with 50 per cent of emission reductions needing to come from underdeveloped technologies. This creates opportunity across green tech, clean air and carbon reduction solutions, and carbon trading strategies,” the bank said.
UBS expects 2022 to be a “year of two halves”, with high rates of economic growth and inflation in the first half of the year, followed by lower growth and prices in the second half.
While the bank does not expect the US Federal Reserve to increase interest rates next year, it sees central banks reducing their emergency monetary accommodation as the economic effects of the pandemic increasingly subside.
However, tighter monetary policy from lenders such as the Bank of England, which is widely expected to increase interest rates this year and next, will not prevent positive equity market returns for investors.
“We have the spikes in inflation and growth now and that is going to persist through to the first half of the year and then we're going to see inflation and growth normalise,” Mark Haefele, chief investment officer at UBS Global Wealth Management, told a seminar on the bank’s 2022 outlook.
“So when we talk to our clients about a year ahead, we want to embed in there that there is going to be some shift over the course of the year in terms of global growth.”
While the bank expects the US, Europe and Japan to benefit from this shift, in the second half of the year, Mr Haefele said investors must also look at how emerging markets such as China have fared.
“They’ve really been laggards in this very strong growth period and are they ready to have the baton passed to them?", he said.
While leading economies around the world saw growth jump in the middle of this year as they reopened following the pandemic, growth has since slowed as countries struggle with rising inflation, higher energy prices and a supply chain crisis.
Solita Marcelli, chief investment officer Americas for UBS Global Wealth Management, said inflation has been the main focus for the market and the bank’s clients over the past year, given the surge in prices witnessed across the globe.
Inflation hit 4.2 per cent in October in the UK this week, a steep rise from 3.1 per cent in the previous month, while the eurozone euro area annual inflation rate was 4.1 per cent in October 2021, up from 3.4 per cent. In the US the rate hit 6.2 per cent in October, the highest rate in 30 years.
Inflation could “become more sticky” in some parts of the world if supply chain disruptions continue or inflation expectations become de-anchored, the IMF warned on Thursday.
In the US, the world's largest economy, inflation is expected to ease in 2022, but policymakers should remain vigilant given upside risks, IMF spokesman Gerry Rice told a regular briefing.
“Continued high levels of US inflation may necessitate a more front-loaded policy response, which would pose a systemic downside for both the US and the global economy,” he said.
Ms Marcelli said the surge has “lasted longer than expected” and “remains a key risk” going into 2022.
“However, we continue to view these price increases as a result of an exceptional surge in demand for goods during the pandemic, which has overwhelmed supply and also logistics,” she said.
“So as the economy normalises and the pandemic threats recede, we expect demand to shift back to services, we're all looking forward to travelling and going out to restaurants more, and that should ease the supply chain pressures and price spikes.”
Ms Marcelli said supply chain woes will take “a quarter or two to resolve”, however port congestion is “not getting worse” and “seems to be nearing its peak".
“For equity markets, the supply chain issues will be much less of a story going forward because it is mostly priced in from our perspective,” she said.
Instead, the market will much more focused on the labour recovery, which is contributing to inflation concerns.
“In the US, we still have 5 million fewer people participating in the labour force, even though job openings are at record levels,” she said.
“There are a few factors at play here, with almost 1.2 million people retiring early and they're unlikely to return. A similar amount of women have dropped out for childcare purposes in the middle of this ongoing quarantine in schools.”
In addition, 500,000 people are still testing positive for Covid every week, but as vaccination rates improve, Ms Marcelli expects more workers to return to the labour market, with the attraction of higher pay also luring staff back — with all these factors helping to ease pressure on wages.
With energy prices also set to stabilise next year “at somewhat higher levels than today” as new production capacity comes online in key regions, the bank sees annual inflation in the US falling to less than 2 per cent, or 1.8 per cent, by the end of next year, from 6.5 per cent at the end of 2021.
With all this in mind, UBS’ core recommendation for investors is to tap into the robust output expected for the first half of next year by buying the winners of global growth. This includes investments in cyclical stocks, including eurozone and Japanese equities, US mid-caps, global financials, commodities, and energy stocks.
The bank also advises investors to seek opportunities in health care, a defensive part of the market that will come to the fore as growth eases over the course of 2022, and to seek unconventional yield as interest rates, bond yields, and credit spreads remain low by historical standards.
For investors looking at the next 10 years, the bank sees the biggest short-to-medium term investment opportunities in the race to net-zero, with clean energy, energy efficiency and digitalisation, electrification, batteries and bio energy key areas to invest in.
Carbon capture carbon utilisation and storage and hydrogen will also become more prominent going forward.
“Sixty countries, collectively responsible for about 55 per cent of global emissions, have pledged to reach net-zero carbon by 2050. At the same time, the world's energy use is expected to increase by nearly by 50 per cent by 2050,” said Ms Marcelli.
“We have to keep in mind that while reducing emissions should increase the renewable power generation as a storage capacity, none of this is going to happen overnight. The net-zero carbon transition is really likely to entail higher commodity prices and cause commodity price volatility. So because of that, you know, investing in traditional commodities, alongside green tech, is a much more diversified and more realistic way to navigate the trends towards net-zero carbon.”
UBS said the world is also grappling with technological disruption, ageing populations, monetary and fiscal co-ordination, and deglobalisation, as well as stronger political calls for wealth redistribution and environmental action.
The pandemic has accelerated the advancement of many of these themes, the bank said, creating uncertainty, but also compelling long-term investment opportunities with the combined revenues of the “ABC technologies” expected to grow to $620bn in 2025 from $384bn in 2020.
“Capturing growth in these areas will require investors to look beyond just mega-cap tech stocks and focus on mid-cap names that could prove to be 'the next big thing', as well as using private equity to gain exposure to early-stage growth companies,” UBS said.