Future Returns: Resetting Investment Expectations for 2022

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.”