APAM Q4 2021 Investment Market Commentary

We are pleased to share our Q4 2021 Investment Market Commentary Report. The report addresses four key themes:

1) Inflation has risen across the global, initially ignited by supply chain issues and high energy costs. Central banks are addressing this with monetary policy, through increasing interest rates and tapering / ending quantitative easing (QE). QE has been employed by central banks almost continuously since the financial crisis, increasing the money supply in the economy through the purchase of sovereign and corporate bonds. Buying trillions of pounds worth of bonds has lowered yields. The impact of this forces investors to search for yield in other more risky asset classes. Consequently, equities and alternatives have benefited. Now this pattern is potentially coming to an end, investors may reassess their risk and return ratio and move back to more safer assets as yields start to return. We discuss this in the American section as the American equity markets are some of the most expensive in the world. As financial markets revert to the mean, the American market is in a precarious position.

2) Our second theme leads on from the first. The UK equity market has underperformed its international peers since 2016. So much so, it now offers a convincing value proposition that is hard to ignore. We have the highest dividend yield and one of the lowest price to earnings ratios. Investors are beginning to act on this, evidenced by the mountain of PE activity over the year. If a rebalancing of portfolios happens (as we discuss in point 1) the UK stands in good place for investors wanting to move away from more expensive markets and take advantage of the relative value the UK has to offer.

3) Throughout the property sections we address the old adage that real estate is an inflation hedge, seeking to judge whether it is truly accurate. Looking at rental yields against CPI it is clear there is no statistical significance between the two. Inflation is not particularly bad for real estate, but returns are driven by supply and demand factors. A passive allocation to real estate will not mitigate the effects of inflation. An active approach to both management and investment is required to continue to prosper in an inflationary environment.

4) ESG continues to gain prominence and its impact on investment decision making will only grow. We highlight two arears where ESG is likely to impact returns in the coming quarters. The first is Offices where the supply of Grade A compliant space is woefully short of the increasing demand. While Grade A rents will be pushed up, a widening yield of Grade B space has already begun. If investors do not address the short comings in their Grade B office space, the risk of a two-tiered market may emerge leaving some assets stranded. In the logistics market, rental yields are underpinned by occupier demand predominately in e-commerce. While we do not foresee the trend for online shopping reducing any time soon, the methods in which goods are delivered will need to be addressed. Current logistics yields leave little room to manoeuvre when the market wakes up and addresses the ESG shortcomings of the current model.

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