December 9, 2021

Long-term leaders

December 9, 2021
Steven Wieting
Chief Investment Strategist and Chief Economist

The sectors and companies that led markets higher in the 2021 rebound are unlikely to repeat their performance. We now advise exposure to long-term leaders, companies in the right industries whose quality, size, balance sheets and focus on dividends may provide benefits to portfolios.

Key takeaways

For much of 2020 and 2021, we recommended buying beaten down assets, given their rebound potential

With the rebound phase largely complete, we recommend shifting portfolios toward sectors and equities that are well positioned to lead markets higher over time

We believe that companies with records of growing dividend payments have the potential to strengthen portfolios

When managements are focused on enhancing their industry position for the long term, they present a total return opportunity as earnings growth and buybacks may further propel returns

We believe 2022 will be a rather different year for financial markets than 2020 and 2021. We do not expect a recession nor another 30% return for global equities as we experienced over the last 12 months – figure 1 in the download below. What worked well in portfolios during the last two years, therefore, is unlikely to work in the period ahead.

Looking back to help us look forward

In 2020, during the initial rebound from the pandemic collapse, we advised exposure to COVID cyclicals.9 Investors who did not follow our recommendations such as buying airline equities – or entire country markets such as Brazil – should not now expect the same sort of performance they missed out on in the past year – figure 2 in the download below.

Many of the assets that have posted the strong rises – such as the 120% annualized gain since April 2020 in hotels, resorts and cruise line operators – were only able to do so because of their previous plunge into the COVID recession.

While plunges and rebounds captivate investors’ attention, historically their effects average out over time. Given this, the wisest approach is to stay invested across market cycles, thereby remaining exposed to economic progress. Figure 3 in the download below shows how average returns from being constantly invested throughout cycles have been above those if the one year before and after recessions are excluded.

Spotlight: Growing companies in growing sectors

Rather than trying to avoid downturns, seeking to beat long-term average returns in equity markets involves two approaches. The first is by investing in firms that consistently lead their industry and within industries whose share of total economic output is growing.

Many of these relate to unstoppable trends such as the secular rise in healthcare demand or the digitization of the economy as macro-level examples of secular growth industries. The opposite of this phenomenon also exists in sectors like traditional autos or oil drilling. They face gradually diminishing growth but are still exposed to cyclical booms and busts – figures 4 and 5 in the download below.

Spotlight: The discipline of dividend growth

The other approach for seeking to outperform long-term average equity returns is to invest in firms that sustainably grow income distributions to shareholders. US firms with the most consistent dividend growth have outperformed the S&P 500 – itself one of the world’s strongest performing markets – by about 60% in the last 30 years – figure 6.


Wealth outlook 2023

Markets in 2023 will lead the economic recovery we foresee for 2024. Therefore, we expect that 2023 may ultimately provide a series of meaningful opportunities for investors who are guided by relevant market precedents. Read our roadmap to recovery: Portfolios to anticipate opportunities. 

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