2021 was a volatile year. Although great progress was made towards recovery and reopening, the path to normality was nevertheless uneven and incomplete, repeatedly disrupted by the resurgence of the variant outbreaks and subsequent restrictions.
As we start the year, we would like to share some of our expectations for markets, industries and the companies we invest in.
We expect that 2022 will thankfully be a year of greater population immunity, either through vaccinations or natural infections. With the aid of medical toolbox options such as antibody therapy, anti-inflammatory and antiviral drugs, we are in a much better place than ever before to manage future outbreaks.
We foresee continued recovery from the impact of the pandemic, although as last year it is unlikely to be a straight line. We also believe that investment will join globalization and digitalization as major drivers for the global economy. Finally, we think that inflation and interest rates are a normal part of economic recovery and growth, and that while there will be bouts of volatility as markets react to economic data and policy changes, the positive fundamentals will prevail. That is why we remain constructive in our outlook for this year.
Healthcare and Consumer
The healthcare sector was relatively resilient in 2021 because the industry was at the forefront of developing vaccines and treatments for Covid-19. The pandemic, however, also posed challenges for the sector.
For pharmaceuticals, the uptake for several newly launched drugs was slow as patients were reluctant to see doctors and try new therapies. In addition, vaccination schedules also had temporary impacts on the administration of some therapies. In 2022 we expect both sentiment and performance to improve over the course of the year. Our optimism is based on the relatively healthy sector fundamentals, improving pipeline prospects, attractive valuations and potential additional clarity on US drug price reform. The last point has been a significant overhang on the overall valuation of the sector and could provide a catalyst for the sector to re-rate.
For medical technology, 2021 was a year of contrasts. Covid-19 had a disproportionate impact on companies with large exposures to elective surgeries as hospitals prioritised treatment for Covid-19 patients. 2021 was supposed to be a year of recovery, but instead turned out to be another year of delayed elective surgeries exacerbated by staff shortages.
On other hand, companies that supplied Covid-19 testing kits and materials relating to vaccine production benefited from strong demand during the year. In 2022, these headwinds and tailwinds are likely to persist as we go through waves of Omicron and potential future variants, although the impact on hospitals’ ability to function is likely to be progressively smaller as we learn to live with the virus.
The long-term fundamentals for the sector remain strong. We expect continued robust pipelines and healthy new innovation cycles, coupled with strong balance sheets that allow for reinvestment, accretive M&As and share buybacks. We are optimistic that those stocks that have been hit hard in the past two years will return to a normalised growth trend which should support multiple expansions and share performance.
In the consumer sector, recovery from Covid-19 is well under way, fuelled by strong consumer demand and the windfalls from accumulated savings during the pandemic. This strong demand, together with supply chain disruptions, caused cost inflation in raw materials, logistics and in some cases wages, creating potential time-lagged margin pressure on the sector. As we progress through 2022, we expect these cost headwinds to persist in the near term but ease over the course of the year.
Over 2022 we also anticipate consumer demand to hold up, helped by low unemployment rates, potential wage increases, the possibility of more fiscal stimulus packages like the Build Back Better bill in the US, and a policy shift in China from counter-cyclical to pro-cyclical early in the year. We favour companies with pricing power that allows them to mitigate cost pressure through price increases, as well as companies with economies of scale and geographic diversity. In spirits, we expect the premiumisation trend to continue, with the on-trade continuing its recovery and the off-trade remaining resilient.
We also expect some recovery in emerging markets. In cosmetics, the return to offices and social gatherings will drive the recovery in make-up, while other categories will continue with their momentum.
In luxury, we see demand from Chinese consumers – which accounts for one-third of sector consumption and almost all of the growth – to hold up, despite the recent economic slowdown. Consumer spending should benefit from the recent return to pro-cyclical policy by the Chinese government. China’s ‘common prosperity’ initiative should also ensure an enlarged middle-class base with an increasing appetite for the consumption of luxury goods. Recent reports by luxury companies for the Christmas quarter are encouraging.
As we recover from the pandemic, mobility and international travel will resume. This should provide a catalyst for the recovery of travel retail, which is an important growth driver of consumer driven sectors but is still at a very depressed level. Anticipated rising interest rates during the year will put some pressure on the sector P/E multiple, although growth in revenues and earnings should offset the multiple contraction over time. Together with dividend increases and share buybacks, we expect consumer stocks to deliver solid positive total shareholder return in 2022.