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Trends We Are Watching in the Year Ahead

by Jo Taylor

If the start to 2022 has signaled one thing, it is that the recent period of heightened uncertainty will persist. As we enter the third year of the pandemic, global growth is slowing, competition for assets remains intense, and pressure from stakeholders is growing. Despite these challenges, investment opportunities abound.

As a global investor with $227 billion in net assets across 50 countries, it is our responsibility to navigate these challenges on behalf of our 331,000 members. Here are some macro trends we are following in 2022.

Pandemic-fueled economic uncertainty

As long as the world has not tamed COVID-19, the virus will continue to disrupt our lives. Some of the unexpected consequences of the pandemic are likely to stay with us in the near term. They include strained supply chains, labour and skill shortages, and soaring energy costs. These pressures are creating the highest inflation we have seen in four decades. While the jury is still out over whether current inflation trends are transitory or longer-lasting, rising prices are testing consumers and businesses alike. That has central banks rethinking monetary policy and considering raising interest rates sooner than previously intimated. Adding to the uncertainty are geopolitical tensions that have caused financial-market turbulence since the start of the year. Diversification and a long-term focus offer some protection against this short-term risk and volatility.

Stretched, but active, financial markets

The financial markets produced some new records in 2021. Activity was boosted by central bank and government stimulus, pent-up consumer demand and high household savings. The S&P 500 stock index rose 26.9%, 2,400 companies went public and early-stage seed companies benefited from a capital injection of US$30 billion. It was also a banner year for private equity, reflecting a mountain of dry powder estimated at more than US$2 trillion. All this deal-making generated concerns about stretched valuations, and how these will react to rising interest rates. Some of these concerns are apparent in the equity-market volatility we have witnessed early this year. Rising interest rates could have a dampening effect on deal-making this year, although rates remain a long way off from so-called normal territory.

Even with M&A activity at record highs, economic trends will continue to spur demand for capital. Major economies are contemplating the most ambitious infrastructure rebuilding plans in a generation, while emerging economies are investing in infrastructure to expand their middle class. The U.S., the U.K. and India have pledged trillions to upgrade transportation systems, make their economies more green, improve healthcare and create millions of jobs. Deep shifts in how we work, engage and interact are creating new businesses and sectors. These new businesses need capital to scale up. Meanwhile, the transition to a net zero economy is creating investment opportunities across renewables and transition assets.

Investors who demonstrate a flexible, innovative and patient approach to capital will continue to win the most attractive investment opportunities.

Rising stakeholder expectations

The pandemic’s uneven impact has added to existing concerns over digital disruption, social inequality and climate change. Increasingly, employees, consumers and citizens are looking for businesses to show leadership in these areas, and shape solutions to address global challenges.

We expect stakeholders to continue to demand that major investors pay more attention to all aspects of ESG. At Ontario Teachers’, identifying and assessing material ESG factors is at the heart of our investment process. These ESG ‘screens’ are an essential part of our plan to achieve net zero emissions by 2050, and deliver aggressive interim targets that include cutting the carbon intensity of our portfolio by two-thirds this decade. We also work with our companies to ensure that they too are working to become more sustainable.

In this environment, capital is important—but so is the ability to demonstrate that you are a stable, trusted partner. As a global investor, we are working to do just that, confident that this approach will enable us to deliver strong returns for our members and help shape a better world.