Equity valuations and investor sentiment both appear elevated heading into 2022 after global markets enjoyed an almost uninterrupted upward march during 2021. However, while forward earnings estimates were consistently revised upwards through the first half of the year, they flattened out in the third quarter.The key question now is whether the long-term trend towards wider profit margins over the past three decades will be reversed. This trend has been driven by several factors, including globalisation, digitisation, falling real interest rates and lower corporate tax rates. However, globalisation may have peaked, interest rates would appear to have little room to fall further, and US corporate tax rates may increase. We believe that some long-term secular themes – such as the disruptive impact of technology across many industries – will endure. However, a cyclical recovery may create potential opportunities in value sectors, as well as in Japanese and emerging market equities.
Diversification and careful security selection will remain critical.
