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Bell Asset Management: Global equities market update and outlook for 2022

November 4, 2021
For professional investors and advisers only

In a recent update, Bell Asset Management Chief Investment Officer, Ned Bell discusses key themes that will influence global equity markets in the year ahead: geopolitics, global monetary policy, the economic cycle rotation and company earnings as well as responsible investing. Ned also looks at where the opportunities for investors may arise in 2022 and a look back at the lessons from this year.

Strong earnings growth despite global GDP slowdown

Company earnings growth, especially in the small to mid-cap sector, will continue to provide great opportunities for investors despite signs of a slowdown in global GDP growth and rising inflation.

During our virtual event, Ned Bell, Chief Investment Officer, said the outlook on global growth was changing because of clear signs of a slowdown in China, led by a drop in property market activity.

“If you look at the most recent Chinese GDP figures, growth came in at 4.9% in Q3, down from 7.9% in the previous quarter. That’s a big drop, and if you think property investment represents 30% of Chinese GDP, it’s a big part of the Chinese economy."

On the positive side, consumer spending has maintained its robust level during 2021, especially in the US, and that is set to continue to drive growth into next year.

We are forecasting global GDP to grow by 4.5% in 2022, moderating from an expected 5.9% this year. China’s growth rate is likely to drop from 8.1% this year to around 5.5% in 2022.

The rising oil price and sharp increases in other commodity prices, however, look set to underpin a steadily growing inflation rate, which is being exacerbated by the prospect of a sharp pick up in wages.

“Wage inflation is becoming more of an issue, and we believe this is going to be an issue for some time. One of the side effects of Covid-19 is that you have a lot of people rethinking their lives and their willingness to work, and this is causing some real labour constraints across multiple geographies and multiple industries.”

You have a situation where GDP is starting to moderate at the same time as inflation is rising. We believe the rise in the inflation outlook and the decelerating growth in China could have a big impact on emerging markets.

Earnings rebound will drive markets

Despite the changing economic backdrop, the corporate earnings outlook across most markets remains very positive. There had been a 37% growth in earnings per share in 2021 for companies in the MSCI World Index but the market had only recovered about 30% from pre-Covid levels.

Earnings have had this amazing recovery, but the market hasn’t necessarily kept up. The gap between earnings growth and share price recovery was most pronounced among small and mid-cap (SMID) companies.

In the SMID market, the disconnect between the earnings recovery and the price recovery is effectively around 40%. That represents a massive opportunity.

The earnings recovery is being driven by a revenue recovery driven by government measures to help the economy but also a lot of the temporary cost reductions driven by Covid-19 are likely to become more permanent.

Facebook shares - a sell

We have a pragmatic and integrated approach to ESG. As a quality focused investor, we are naturally aligned with companies that not only have very good ESG characteristics, but they need little encouragement to put in place policies to improve their ESG outcomes. A key approach we utilise is to assess the ESG risks facing a company and then identify what the company is doing to alleviate them and encourage the company to share these views.

This approach had led us to sell our entire position in Facebook. Facebook has had ESG issues for some time and effectively have been on watch for us for about two years. We’ve been looking to see their response to the criticism they have faced from regulators, especially in the U.S. We have got to the point where we felt that they are not doing enough, they were not willing to make some hard decisions to improve their outcomes. And their unwillingness to improve their game will ultimately have an impact on their earnings.

Recent additions to the portfolio include three small cap firms − GN Group, Intertek and Amedisys Inc.

“What all these names have in common is that we have been patient in buying into them, waiting for the right price. Looking ahead, over the next 12 to 18 months, we are confident these companies will see some earnings expansion.”

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