- ‘End of free money’ may mean return to fundamentals for stocks
- Deutsche Bank strategists see opportunity for active investing
Next year will mark the return of stock-picking for equity markets, according to Deutsche Bank AG.
“In 2022, as equity markets lose the flood of money that has propped up all stocks over the last decade, investors may be forced to become more discerning,” strategist Luke Templeman wrote in a note on Wednesday.
Rising bond yields amid interest rate hikes will give investors more options in fixed income and other rate-sensitive investments, according to Deutsche Bank. And with liquidity less abundant as asset purchases are pared back, fund managers may have to do more homework to get meaningful returns. “Finally, active managers may be back in vogue,” Templeman wrote.
After this year’s almost indiscriminate rally took equities to new highs, the outlook for 2022 is much more muted, as tapering and Covid-19 risks are expected to weigh on returns. And Templeman is not alone in predicting the return of stock picking next year, with credit investors at Amundi SA and Vanguard Group Inc. also saying fundamentals will become more important as stimulus is reduced.
This year’s market exuberance may be the peak of a trend that started after the 2008-2009 financial crisis, says Templeman. At that time, a significant chunk of the money that was pumped into economies by central banks was channeled to passive funds which bought entire equity indexes, and not specific companies, according to Deutsche Bank.
Still, the popularity of active investing has a long way to come back. While equity funds have seen record inflows of about $900 billion this year, nearly 90% of these additions have gone into passive exchange-traded funds, according to Bank of America Corp. and EPFR Global data. Investors have been favoring passive products because of their lower cost and ease of use.
While markets have “flirted with” the idea of discriminating between stronger and weaker companies since the onset of the pandemic, next year may be different. “Equity markets will be shocked by the return of fundamentals,” Templeman wrote in his note.