Future Returns: Resetting Investment Expectations for 2022

While economies across the world are strong, lofty valuations for public companies and the likelihood of interest-rate hikes mean investors are resetting their expectations for returns.

“This next phase of the economic cycle is definitely going to be slower than the record-breaking rally and pivot in the cycle that we saw over the last two years,” says Amanda Agati, chief investment officer for PNC Financial Services Asset Management Group. “We think it’s going to be a much tougher slog.”

Keep in mind, this more challenging outlook comes after a year when the S&P 500 index rose nearly 27%, capping a three-year period when the broad-market index was up more than 90%, according to Dow Jones Market Data.

For 2022, the S&P 500 is projected to gain 9%, which in a non-pandemic environment would certainly be considered a “home run for large-cap domestic equities,” Agati says. But relative to the last three years, it’s certainly lower.

When it comes to public debt, PNC is even more cautious. While the bank expects a “lower-for-longer” interest-rate environment to persist for the next several years, its economists do expect rates to move higher globally in 2022, putting price pressure on most categories of bonds.

In its 10-year forecast, PNC predicts the Bloomberg U.S. Aggregate Bond Index of intermediate-term corporate and government bonds will return 2.3% annually, while the Bloomberg Global Aggregate ex-U.S. Markets Index will return 2%.

The bright star for PNC across the “multi-asset universe,” Agati says, is alternative investments—private equity, private debt, and venture capital. “There are a lot more opportunities [in alternatives] for meaningfully additive returns relative to public markets going forward,” she says.

Penta recently spoke about these opportunities with Agati, who is responsible for the investment policies guiding PNC Private Bank and PNC Private Bank Hawthorn, which works with family offices. She also guides the investment policies for PNC Institutional Asset Management.

‘Innovation and Growth’

In a slower-growing world, Agati says investors are focusing on companies offering innovation and growth, “and they’re willing to pay up for it to a degree,” she says. They will find most of these opportunities are in private markets.

While nothing is “table-pounding cheap,” even in private equity, the return expectations are higher, mainly because of the premium investors receive by agreeing to lock up their money for longer. Private-equity funds typically have fixed terms of 10 years.

Investing in private equity, however, is a multi-year process, as the strongest portfolios are diversified collections of funds with different vintage years, meaning the date the funds begin to put capital to work. “Each vintage year is unique and diverse relative to the others,” Agati says.

Private-equity funds investing in 2022, for instance, are likely to be shaped by an increase in mergers and acquisitions, buyouts, and special-purpose companies fueled by “still unprecedented fiscal and monetary support,” the bank wrote in a first-quarter investment strategy report.

Funds investing this year also will be working against a backdrop of heightened stock market volatility and uneven economic growth—both of which could create pockets of opportunity.

“The ballast that private-investment strategies can bring in particularly volatile times—not being beholden to quarterly earnings calls and the drivers around updating guidance in an uncertain backdrop—can provide comfort in portfolios,” Agati says.

Life Sciences, Technology, and Crypto

For 2022, private equity themes worth accessing include life sciences, technology, and cryptocurrency.

Life sciences are a “real area of innovation and investment” that has been catalyzed by the pandemic. In technology more broadly, there’s a boom in innovation particularly related to the metaverse, or the creation of virtual worlds.

“The tech [sector] has really been able to use the pandemic to its advantage, pulling away from the pack, and continuing to invest and allocate capital and drive innovation,” Agati says.

More entrepreneurs this year also are likely to harness blockchain technology to develop new companies and products, opportunities that will likely be made available through venture-capital funds. This “could be a very interesting vintage year for some of those exposures to take hold,” she says.

Another theme that isn’t necessarily specific to 2022 as a vintage year is impact investing in local communities. “There’s this real homegrown feeling of responsibility and duty for those who are impact-oriented or responsible investing-oriented to try to find a way to have the impact in their own backyard,” Agati says.

Finding Opportunities in Fixed-Income

One potentially bright spot in public debt is emerging markets, which are driven by variables outside of U.S. Federal Reserve policy. PNC expects the Bloomberg Emerging Markets Aggregate bond index to return 6.2% annually over the next 10 years.

That is partly because of current valuation levels, but also because PNC expects low rates globally will drive demand for emerging-market debt. Also, lofty levels for commodities exported from emerging markets have made government balance sheets in many of these countries stronger, according to the 2022 outlook.

“The growth outlook for emerging markets in general is one of the brightest in the multi-asset universe,” Agati says.

Because individual countries could experience unexpected tensions or shocks, PNC recommends investors consider investing in this sector through actively managed funds. It’s definitely a place “where astute active managers can add value to tilt toward or away from benchmark exposures,” she says.

Wealthy investors also can consider private debt funds, which invest in below-investment-grade loans, mezzanine funding, and distressed or special situation funds, according to PNC. That’s because the drivers for privately issued debt are not as closely tied to the movement in interest rates as in public markets, Agati says.

That means the cost of capital for borrowers in private markets is relatively low, providing more runway for deal-making. “Even though parts of the private market cycle and the economic cycle are further along from the bottom of the pandemic, we don’t think the private debt cycle is there,” Agati says. “It just creates a more interesting opportunity for investors.”

But as with emerging market debt, investing in private debt is enhanced by active managers. That’s in part because managers can re-price their investments quickly in response to changing conditions.

According to PNC, “allocations to private debt may be among the first to benefit from opportunities that arise among rapidly growing industries looking for new sources of capital.”

An original watercolour illustration for the cover of Harry Potter and the Philosopher’s Stone, 1997 — the first book in J.K. Rowling’s hit series—could sell for US$600,000 at a Sotheby’s auction this summer.

The illustration is headlining a June 26 sale in New York that will also feature big-ticket items from the collection of the late Dr. Rodney P. Swantko, a surgeon and collector from Indiana, including manuscripts by poet Edgar Allan Poe and Arthur Conan Doyle, author of the Sherlock Holmes books

The Harry Potter illustration, which introduced the young wizard character to the world, is expected to sell for between US$400,000 to US$600,000, which would make it the highest-priced item ever sold related to the Harry Potter world. This is the second time the illustration has been sold, however—it was on the auction block at Sotheby’s in London in 2001, where it achieved £85,750 (US$107,316).

The artist of the illustration, Thomas Taylor, was 23 years old at the time and a graduate student working at a children’s bookshop. According to Sotheby’s, Taylor took a “professional commission from an unknown author to visualise a unique wizarding world,” Sotheby’s said in a news release. He depicted Harry Potter boarding the train to Hogwarts on platform9 ¾ platform, and the illustration became the “universal image” of the Harry Potter series, Sotheby’s said.

“It is exciting to see the painting that marks the very start of my career, decades later and as bright as ever! It takes me back to the experience of reading Harry Potter for the first time—one of the first people in the world to do so—and the process of creating what is now an iconic image,” Taylor said in the release.

Meanwhile, to commemorate the 175th anniversary of Edgar Allan Poe’s For Annie , 1849, Sotheby’s recently reunited the autographed manuscript of the poem with the author’s home, Poe Cottage, in the Bronx.

The cottage is where the author lived with his wife, Virginia, and mother-in-law, Maria Clemm, from 1846 until he died in 1849. The manuscript, also from the Swantko collection, will remain at the home until it is offered at auction at Sotheby’s on June 26 with an estimate between US$400,000 and US$600,000.

The autographed manuscript will remain at Poe Cottage until it is offered at auction at Sotheby’s on June 26.
Matthew Borowick for Sotheby’s

Poe Cottage, preserved and overseen by the Bronx County Historical Society, is home to many of the author’s famous works, including Eureka , 1948, and Annabel Lee , 1927.

“To reunite the For Annie manuscript with the Poe Cottage nearly two centuries after it was first composed brought to life literary history for a truly special and unique occasion,” Richard Austin , Sotheby’s Global Head of Books & Manuscripts, said in a news release.

For Annie was one of Poe’s most important compositions, and was addressed to Nancy “Annie” L. Richmond, one of the several women Poe pursued after his wife Viriginia’s death from tuberculosis in 1847.

In a letter to Richmond herself, Poe proclaimed For Annie was his best work: “I think the lines For Annie much the best I have ever written.”

The poem was composed in 1849, only months before Poe’s death, Sotheby’s said in the piece, Poe highlights the romantic comfort he feels from a woman named Annie while simultaneously grappling with the darkness of death, with lines like “And the fever called ‘living’ is conquered at last.”

Poe Cottage, preserved and overseen by the Bronx County Historical Society, is home to many of the author’s famous works, including Eureka, 1948, and Annabel Lee,, 1927.
Matthew Borowick for Sotheby’s

In the margins of the manuscript are the original handwritten instructions by Nathaniel P. Willis, co-editor of the New York Home Journal, where Poe published other poems such as The Raven and submitted For Annie on April 20, 1849.

Willis added Poe’s name in the top right and instructions about printing and presenting the poem on the side. The poem was also published in the Boston Weekly that same month.

Another piece of literary history included in the Swantko sale could surpass US$1 million. Conan Doyle’s autographed manuscript of the Sherlock Holmes tale The Sign of Four , 1889, is estimated to achieve between US$800,000 and US$1.2 million.

Future Returns: Resetting Investment Expectations for 2022

What to expect from the year ahead.