What does Purpose's CIO think 2022 has in store for investors?

As he looks back at 2021 and ahead to 2022, what stands out for Greg Taylor, Purpose Investments’ Chief Investment Officer, are the central banks, market, and energy and cannabis stocks.

The central banks have been the most dominant factor in the market. They responded quickly to the pandemic and did all they could to address it. But, heading into 2022, he told Wealth Professional, “it’s all going to be about balancing expectations”.

“We’ve seen the economies recover and market come back to new highs,” said Taylor. “But, it’s now going to be an interesting transition period as the central banks move away from being highly accommodative to being more measured and trying to normalize interest-rate policies.

“I think we’re entering a stage in the new normal, where the central banks are going to be less focused on the stock market and more focused on taming inflation, and that’ll cause more volatility. I think it’ll be a much different experience for investors going forward.”

While the markets for some sectors have been more volatile lately than in previous months, he noted the bond markets haven’t priced in yet and are still trapped in the 1.5% area, which he expects to start moving higher.

“I think the biggest concern for markets is really going to be a central bank policy error,” he said. There’s concern that once they start to remove the stimulus and normalize rates, they could do it in a way that disrupts the market or at a time where the economy isn’t strong enough to absorb it.

Taylor thought the central banks could have started tapering and hiking rates earlier this summer when things were better, but now may have waited too long to start to normalize policy since it’s harder to cut rates and consumption if there’s another crisis.

Markets

Taylor said it’s also been a “weird” market where everything’s caught up with the big cap names. While companies such as Microsoft and Amazon haven’t had a bad year, “there has been a lot of damage when we look at smaller caps.”

“We haven’t really had a market where we had the small caps work in different sectors. It’s really been a narrow market that’s been holding up the indices,” he said, warning investors to watch if it broadens out as they proceed. “There’s a lot of cash on the sidelines that is available to go to equities that should perform. So, it all adds up to volatility in the next year or so.”

Taylor cautioned investors about being complacent since returns have been easier for awhile. He encouraged them to look at risk managed solutions. Some products have hedging in place to minimize vulnerability. Investors could also look at alternatives, such as structured notes, which he expects will continue to do well in this interest rate environment, and different strategies that may have lower return than what the market’s been seeing.

He also expects the push to real assets, particularly commodities and real estate, to help investors guard against inflation and minimize the risk of losing purchasing power that could impact their spending patterns and retirement goals.

Energy

Taylor said investors are still embracing environment, social, and governance (ESG) products, but “it’s not really black and white. There’s going to be different shades of gray”. He cautioned investors not to avoid some sectors, such as energy, since it is working on more environmentally sustainable energy sources.

“It’s not going to happen overnight, so I think you want to look at the theme of energy transition and really focus on what companies are doing to get us to a new world of cleaner energy,” he said. “And look at the technologies, whether it’s natural gas or renewables that can work with the energy sector.”

Given this year’s move back into commodities, he said some energy stocks have been among the best performing, so investors who screened those out for ESG reasons missed great returns while many of these companies have embraced ESG, cleaned up their policies, and done a lot of proactive things to become cleaner. They’ve also become very profitable, so are going to start returning a lot.

“So, don’t just be fully exclusionary on sectors, but work on including companies that are doing better and reward them for doing the right thing,” he said noting the governance side of ESG is important, and some energy companies “have gone above and beyond other sectors to really embrace this and find ways to improve the policies on all metrics to make sure that they’re above board.”

Cannabis & Crypto

While the cannabis sector has lagged in 2021, causing some to use it for a tax loss, Taylor said this could provide an opportunity for investors to look at the sector. Some companies with more focus on the U.S. have done well financially with good earnings growth and very attractive valuations, though “they’ve fallen off the radar”. He said interest may pick up if President Joe Biden passes some bills before the mid-term elections next year.

Investors also need to figure out how they want to position crypto in their portfolios.

“I think it’s something that everyone should have a little bit of exposure to,” he said. “It’s really something that’s in the early days and the next move of technology should be around crypto.”