A madcap 2021 financial year is now done and dusted.
Then in November came the news that the first vaccines were nearing approval and Americans voted in the US elections.
Remember how Donald Trump used to be president? That feels like another century ago.
This autumn was spent worrying about inflation. It’s great news that the economy is recovering and people are back in jobs — but subsequent inflation could bring an end to those sweet near-zero interest rates.
There is just no satisfying investors.
So after a 12 months that saw a decade’s worth of economic and financial upheaval, what have we learned from it all?
The Motley Fool asked 5 experts what lessons we should take into 2022.
Return to first principles
Hyperion Asset Management lead portfolio manager Jason Orthman told The Motley Fool that the past financial year demonstrated just “how complicated and uncertain the world and markets can be”.
“The biggest learning is the need to continually return to first principles when evaluating uncertainty, both in terms of the economic framework and company fundamentals.”
Earnings — not heroic stories — guide a company’s share price in the long run.
“It’s easy to get distracted with headlines, style rotations, short-term macro indicators, company short position levels and news flow,” said Orthman.
“It’s more useful to focus on which businesses have modern, attractive value propositions and how they are relevant to the next generation of users. Most conditions can be navigated longer term if you return to first principles.”
No single investment style is the sole winner
The turbulence of the 2021 financial year showed no one investment style was a consistent winner, claimed Redpoint Investment Management chief executive Max Cappetta.
“Quality stocks – those that exhibit cashflow strength and a solid balance sheet – were the place to be as COVID lockdowns commenced in Q1 2020,” he told The Motley Fool.
“Growth stocks then took over as the market rebounded and dominated through to the end of 2020, with value reasserting itself as the pre-eminent strategy towards latter 2020 and into 2021 on the back of the global vaccine roll-out confidence due to vaccine rollouts across the globe.”
Cappetta warned investors they live in “a multifactor world”.
“Different disciplines are rewarded differently through time,” he said.
“Having a diversity of insights in a portfolio at all times is a better path to long term success than trying to time entry to, and exit from, different approaches.”
The S&P/ASX 200 Index (ASX: XJO) has now ascended higher than its pre-pandemic highs but forward earnings haven’t moved ahead in proportion, according to Cappetta.
“The upcoming reporting season will provide important insight into which companies and sectors are back on track and those which are still struggling,” he said.
“The lesson here for investors is that while earnings expectations are typically sound drivers of share price performance, we now need to focus on earnings delivery to justify some of the more lofty valuations.”
Focus on the long term
All the turbulence of the past 12 months will end up being just noise in the longer term, Bennelong Funds Management research relationships director Stuart Fechner told The Motley Fool.
“It’s important to maintain a long term perspective. It may not feel like it at the time, but that short term pain in fact often provides good long term opportunities if a sense of patience and perspective is maintained,” he said.
“You can never tell how long it will take for a market fall to be recovered but we all know it will be. If you can keep your head in such turbulent times there are opportunities to be taken that will provide benefits over time.”
Fechner agreed with Orthman that fundamentals like a company’s “financial strength and quality” were critical in times like this.
“Such simple qualities can lose their level of importance for some investors when the market is booming along, but it is these very qualities that ensure they can survive the tough times and be a good ongoing investment proposition.”
Australians have too much cash
Fidelity cross asset investment specialist Anthony Doyle said that the typical Australian is holding excessive cash, which is just shrinking in their hands.
“For example, the Australian 10-year government bond yield is around 1.5% today. If inflation’s 2%, well, you’re going backwards,” he told the Yahoo Finance Summit.
“So a lot of Aussies — whether they’re self-managed or retail investors — have far too much cash. Too much, and they have to use that cash and enable that capital to work harder for them in the future.”
Doyle, however, did warn that the 40-year “tailwind of falling interest rates” is now finished.
The consequence was that investors now needed to search for structural winners in the new financial year. And that might mean looking beyond our shores.
“One area that has consensus across Fidelity is emerging markets and Asia,” he said.
“A lot of these long term structural themes have been accelerated by the pandemic, whether it’d be growing incomes, superior demographics, technology adoption, or the very large consumer markets… Of the next 1 billion people to enter the global middle class, 850 million will reside in Asia.”
Doyle told The Motley Fool that timing changes in the market is “extremely difficult”.
“No-one rang a bell at the end of March to indicate the change of direction for bond yields or the rotation into value from growth stocks. It just happened,” he said.
“Often it is only clear well after the event what has triggered a change – by which time, of course, it is too late.”
Going back to investment basics was the best way to protect oneself from uncertainty, added Doyle.
“By being well-diversified, by avoiding the temptation to try and time the market, by investing regularly through the cycle, and by keeping enough cash [in] hand so that we can take the market’s ups and downs in our stride.”
Think of ‘big picture’ themes
Marcus Today director Marcus Padley encouraged investors to take a step back from daily news and financial reports.
Instead, try to think of “a few simple events, fads and trends” that would truly move the needle on stock prices.
“I’ve always said there is no money in PEs or yields, [but] there is money in sitting by a swimming pool and working out what nobody expects,” he said in a memo to clients.
“Every year there are a handful of things that you needed to know that would have swept away all the bollocks, all the financial theory, all the research, all the compilations, and all the endless blah blah blah we were bombarded with.”
Padley suggested 4 themes that are already full-steam ahead as a good place to start the new financial year:
- Assume the bull market will continue
- Real estate prices are hot, making housing shares “low-risk”
- Interest rates won’t rise significantly, meaning real estate investment trusts, infrastructure and utility stocks will rise
- Electric vehicles are taking over, so miners producing copper and lithium will trend up
“Continuation of the current trend is the most likely outcome in the stock market,” he said.
“It’s probably best you respect the current themes and not bet against them until proved otherwise.”