Was 2021 the year environment, social, and governance (ESG) issues leaped to the forefront for investors?
The numbers sure say so.
Over $649 billion flowed into ESG-focused funds the last year¹ as investors increasingly pushed conversations about climate change and social justice with companies and regulators alike. By the end of 2021, the massive influx of capital led to ESG funds comprising roughly 10% of worldwide fund assets. Unsurprisingly, the year was marked by several significant movements on the ESG front amid a rise in shareholder engagement and an increasing call-to-action by governments worldwide to combat the intensifying climate crisis.
2021 also wrapped up on a volatile note for markets, with the emergence of the omicron variant of COVID-19 and ongoing uncertainty over inflation, rate hikes, and the growth slowdown in China dominating the headlines. However, these fears masked what turned out to be a strong, positive quarter for most equity regions outside of emerging markets.
The fourth quarter was also a more favorable environment for global ex-U.S., U.S. small-cap, Canada, emerging markets, and Australia equity managers, while proving more challenging for U.S. large-cap, Europe, UK, Japan, and long/short equity managers. Low volatility and quality were the best-performing factors of the quarter, while the growth factor underperformed in most regions and the value factor saw mixed results. Importantly, the style was less of a driver of performance throughout the quarter, with stock selection being of greater importance.
Information technology, utilities, and materials were the clear winners across most regions. Meanwhile, higher growth/valuation sectors such as communication services, health care, and consumer discretionary - which have largely been beneficiaries during the pandemic - lagged in performance due to profit-taking and ongoing concerns around inflation and the extent of potential rate hikes.
Our fourth-quarter survey reveals that while managers remain generally optimistic about the economy, they are increasingly more discerning on the breadth of the recovery. This is leading to a preference for stronger balance-sheet businesses with pricing power, given the stickiness of inflation. Managers also note that year-over-year earnings improvement will potentially be more challenging in 2022 relative to 2021, given the base effects.
Drawing on our distinctive relationship with underlying managers, we've compiled these and other insights from specialists across the manager universe into an easy-to-read report. Listed below are the chief tactical observations from key equity and geographic regions around the globe during the fourth quarter of 2021. We've also added a special section on ESG investing at the top that shares the key trends our manager research team foresees in the year ahead.
ESG trends for 2022
Emphasis on Scope 3 emissions disclosure
Private capital focus for green deals
Green bonds
Carbon markets
Sustainability accountability
Emphasis on the S in ESG
Australian equities
Change in capex mix supports inflation being transitory
Offset greenwashing
Canadian equities
Investment opportunities down the market cap spectrum
Favorable environment for banks
Expected year-over-year dividend growth
COVID-19 + inflation + interest rates = volatility
Emerging markets equities
Clouds lifting for a China recovery
Steering around political headlights
Bottom-fishing out at sea
Actively covering for inflation expectations
Europe and UK equities
Value opportunities are diversifying
Europe: Earnings-per-share (EPS) expectations for 2022-23 remain depressed
Europe: Inflation is here to stay
UK: Cyclical value
UK: Environmental thematic
Global equities
Managers greet the new year with more caution
Inflation prompts the Federal Reserve to use its brakes
Style trends are muted, security selection carries the quarter
Climate and energy trends create a complex opportunity set
Japan equities
Focus on Fed's tightening policy
Mixed view on the sustainability of inflationary pressures
Reopening theme postponed but still in motion
Currency headwinds and inflation
Long/short equity
Significant deleveraging event causes a wait-and-see approach
Continued lag in long alpha, particularly in crowded names
Custom short baskets
Reduction from unprofitable/expensive tech
Real assets equities
Increased real estate M&A activity in 2021
Real estate trends
Infrastructure lagging economic recovery offers opportunities
U.S. large-cap equities
Optimism for reopening-related industries
Inflation and ability to pass price
Favorable outlook for banks
Software and internet stocks face difficult comparisons
U.S. small-cap equities
Muted outlook for small caps, positive outlook for active management
Positioning in energy and banks is consistent across all styles
Inflation and small caps
Value managers become more discerning within cyclicals
Growth managers acknowledge stretched valuations in technology but aren't completely abandoning the sector
The bottom line
While managers are largely sanguine on the economic growth prospects for 2022, persistent inflation and rising rates mean that superior, risk-adjusted returns will likely be harder to achieve than in the past few years. Amid such an environment, we believe the views of specialist managers will be critical to identifying new opportunities and exploiting market inefficiencies. We look forward to continuing to share these insights with you as the new year unfolds.
¹ Source: Refinitiv Lipper
² Data from Morgan Stanley Prime Brokerage
Disclosures
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
This material is not an offer, solicitation or recommendation to purchase any security.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.
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