The world is recovering from the pandemic and global economy is poised to be fueled by the normalisation of economic activity globally. Over here in Malaysia, we just opened up our international borders and is seen as a good sign for our economic growth.
As a smart investor, we need to be aware of the market trends that are happening all around us.
Let’s hear from Germaine Share who is the Director of Manager Research at Morningstar, on the 3 market trends that an investor should look out for in 2022.
1. ESG (Environmental, Social, and Governance)
We continued to see growing interests in sustainable investing as investors become increasingly aware of ESG issues, and some of them believe it would lead to better investment outcomes.
Global sustainable fund assets grew to US$2.74 trillion as of 2021-end, up 53% from a year ago, according to Morningstar’s quarterly sustainable fund flows report. There are now almost 6,000 sustainable funds globally. Inflows grew as well, driven by continued investor interest in environmental, social, and governance issues and by regulation.
In Malaysia, despite a small base, locally domiciled ESG funds expanded by 50% over 2021 to US$877.1 billion. There were record 13 sustainable fund launches in 2021, compared to just two launches a year earlier. We see the rising number of ESG fund launches not unique to Malaysia, but a global trend on the back of greater ESG awareness amongst investors with the importance of climate change agenda championed by various governments.
As sustainable investing becomes more mainstream, we see more regulators in Asia launching practical guidelines to help avoid greenwashing and importantly, to better inform investors when they consider investing in ESG funds.
For many years, inflation has not been a major concern for investors given the low interest rates and decent market returns. This year, the risk is real. Inflation is at 30-year highs in the US. Higher inflation tends to lead to higher interest rates, which hurt corporate profits and cause losses for bond holders.
Equity investors’ total return can also be in jeopardy: their dividend payments are worth less, and their earnings can suffer from higher input costs, particularly if they are not in a position to pass along higher prices to their consumers. As earnings come under pressure, so can their ability to generate inflation-beating returns.
There are many assets suited for inflation protection, such as short-duration bonds or cash, high-yield bonds or inflation-protected bonds, or stocks that are either positively correlated to inflation, for example energy stocks, or high-quality names with high degrees of pricing power that can pass along rising input costs.
With negative yields on government bonds (after adjusting for inflation) across developed government-bond markets and corporate credit spreads at multi-year lows, the global fixed-income universe is looking at paltry returns.
In comparison, Asian and emerging market bonds continue to offer a reasonable yield for income-seeking investors who are comfortable with taking more risk.
About the author
Germaine Share is the Director of Manager Research at Morningstar