Investors should feel optimistic about corporate profitability and market returns over the coming year, despite mounting inflation and central bank tightening, according to Tyndall Investment Management.
Richard Scrope, manager of the VT Tyndall Global Select Fund at Tyndall Investment Management, said: “The sharp rise in inflation seen in the back half of 2021 has led to analyst estimates for 2022 being lowered. However, this sets an easier bar for companies to hurdle and exceed. Most companies are in the process of, or are already, passing through the inflation headwinds through price increases to the end consumer.
“Although it is not yet over, there are initial signs that the world is starting to overcome the supply chain disruptions, suggesting that we may well have passed the point of peak inflation. Lumber prices, freight rates and even port congestion are down from their previously elevated levels.”
Scrope said that just as many companies faced a lag between price increases being implemented to offset increased input costs, it is likely that a similar effect will occur as inflation subsides.
Scrope also noted that with inventories now close to record lows, most if not all customer orders will have been postponed until supply can catch up rather than be cancelled, so revenues and company visibility are likely to be better in 2022 than during the past year.
He said: “These companies that are able to master Porter’s five forces should be able to convert these revenues into higher margins and cash flows, thus enabling them to continue to invest in future growth and boost shareholder returns. However, to do so also requires astute management teams.
“Just as in 2021, we expect 2022 will not be a steady path and swings in investor sentiment will force changes in leadership, suggesting that investors would be prudent to position their portfolios with a mix of re-opening pandemic winners, reflation beneficiaries and traditional growth companies blended with those that continue to benefit from the digital transformation that the world is undergoing.”
