Fund ideas for 2022: technology, healthcare and commodities

11th January 2022 08:38

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Ceri Jones runs through the outlook for three key sectors of the market, and names some fund ideas.

No investment sector divides opinion quite as sharply as technology. Tech as a whole has performed well over the last five years, confounding investors who were convinced it was overvalued by historical standards and that the Nasdaq would nosedive.

“Valuations remain the biggest elephant in the room,” says Sundeep Gantori, equity strategist executive director at UBS Global Wealth Management. “But Covid-19 accelerated many trends and tech has become embedded in our daily lives.” He predicts stock valuations will come down slightly “but not to pre-pandemic levels” and that the sector will “see decent growth, compared with a deceleration in other sectors such as materials”.

Will the tech rally run out of steam when rates rise?

Tech shares slide, however, when interest rates rise. This is because the market uses a discounting mechanism to value a stock’s future stream of earnings against today’s prices, and tech stocks often assume growth assumptions of 20% or 30% a year.

“Over the last two months, technology bears have pointed to the increasing likelihood of three rises in US interest rates in 2022 and the negative effect this will have on the sector’s returns,” says Robin Geffen, manager of the Liontrust Global Technology. “The bears believe that tech stocks, as long-duration assets, will strongly underperform as US rates and the yield on Treasuries rise.”

He adds: “We believe that technology bears are mistaken here as…the sector’s sensitivity to US rates is actually lower than the broader market, because it is less indebted.

“Recently, we have seen lockdowns across Europe and the emergence of Omicron. With this, consensus opinion has shifted, with the previous view of three interest rate rises in 2022 replaced by a consensus of just one US rate increase next year, further undermining those of a bearish disposition.”

If the threat of rate rises sends technology shares lower, this could be a buying opportunity. “There can be overreactions in tech,” says Gantori. “There are upcycles and people tend to get excited, such as getting hyped about the metaverse. Any steep increase in rates is a risk and when they have risen sharply in recent weeks there has been a correction in tech. If rates go up gently and gradually, and companies still show strong growth, then any downturn could be opportunity to increase exposure to good quality companies.”

Small and mid-size companies offer greater opportunities than the oversold mega-giants, as here you would expect to find future winners at attractive valuations.

“However there are still some select opportunities in mega-tech, especially those that have made large investments in their businesses over the last 12 to 18 months, and are now in a better position,” says Gantori.

Growth in cloud computing has been faster and more lucrative than expected with the Goliath trio of Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) still dominating this space.

In China, select companies in gaming and e-commerce have bounced strongly in the last few months as they escaped additional regulation, but some market leaders are under pressure and trade on a significant discount which may be an opportunity.

Facebook/Meta (NASDAQ:FB) is building a Metaverse, and a good play here is NVIDIA (NASDAQ:NVDA) whose high function graphite processing units are critical for building any Metaverse platform, Geffen says.

There are so many developments that it can be hard to see the wood for the trees.

“Artificial intelligence has the highest growth but for investors looking for a more defensive approach, cyber-security is worth a look,” says Gantori. “All companies now rely on tech and cyberattacks are increasing, which means we have never seen a challenging year for this sector.”

The two popular tech trusts are Allianz Technology (LSE:ATT) and Polar Capital Technology (LSE:PCT). Another option is Digital 9 Infrastructure (LSE:DGI9). This invests in infrastructure for the digital world, such as data centres, and subsea and land fibre optic networks.

In the passive arena, consider Rize Cybersecurity Data Privacy ETF (LSE:CYBR), which carries a yearly fee of 0.45%

Technology played a key role in our response to Covid-19: without the advances in artificial intelligence it would have taken much longer to deliver vaccines and identify antiviral candidates.

How to profit from the healthcare boom

Healthcare itself is an attractive growth sector given incredible medical advances in areas such as gene editing and DNA sequencing, but it has lagged the more economically sensitive value sectors this year.

Laurie Don, investment manager on the Liontrust Sustainable Investment team, favours innovative companies that can enable a step change in how particular areas of healthcare operate.

He adds: “Key areas to watch include gene therapies – a one and done cure for disease versus the traditional pharmaceutical model of taking a pill for the rest of your life – and liquid biopsy, which enables early detection and monitoring of diseases through blood draws rather than solid tissue samples. This paves the way for early diagnostics and pre-emptive treatment: testing babies before birth and adults early and on an ongoing basis.

“The price of sequencing the genome will continue to fall, with equipment more prevalent and testing more convenient. Ultimately, we will see more targeted vaccines: mRNA technologies can help treat cancer, for example, moving the industry beyond more traditional vaccinated areas.”

For those on the lookout for ideas the high conviction BB Healthcare Trust (LSE:BBH) holds 35 stocks at most, and runs a discount control mechanism. Another option is Polar Capital Global Healthcare (LSE:PCGH). The investment trust was caught out during the pandemic by being overweight to healthcare equipment at a time when elective procedures were halted overnight, but it is well positioned for their recommencement.

Biotech stocks fell back last year after soaring in 2020 amid excitement over Covid vaccines such as Moderna (NASDAQ:MRNA). There is concern that the US will cap drug prices and limit IPOs, which have doubled this year despite the fact that many have yet to start human drug trials. On the other hand, falling valuations may boost mergers and acquisitions in 2022, and big biopharmaceutical companies have plenty of cash for deals.

One option to consider is Candriam Equities L Biotech, which invests in molecular diagnostics and scientific equipment companies as well as drugs companies.

In the Association’s of Investment Companies’ Biotechnology & Healthcare sector two biotech-focused options are Biotech Growth (LSE:BIOG) and International Biotechnology (LSE:IBT).

Syncona (LSE:SYNC), which focuses on founding, building and funding a portfolio of global leaders in life sciences, is a member of interactive investor’s ACE 40 list.

Outlook for commodities in 2022

In commodities, Chinese demand is key. China consumes 55% of the world’s coal and its demand for energy soared as its economy recovered from the first round of Covid, while its supplies of coal and hydropower were hindered by environmental crackdowns and droughts respectively.

The Chinese authorities deem commodities strategically important and are not shy about intervening. For example, worried that rising costs would squeeze the manufacturing sector, the authorities have recently sold some metal and oil reserves and cracked down on speculative hoarding. The energy transition will make commodity prices much more volatile, and a lot will depend on how far Chinese authorities will want to interfere.

Last year’s lockdowns curtailed global demand for oil by as much as 20% during the worst phase, but the easing of restrictions, supply cuts by Opec and government stimulus sparked a recovery in oil prices. More recently, the Omicron variant has impacted oil prices. However, the surprise move by Saudi Arabia and other Opec members to increase crude supply next year by 400,000 barrels a day - rather than hold back supply in an attempt to prop up prices or punish US resident Joe Biden - has calmed the market.

Gold, meanwhile, has always been seen as a safe haven in times of volatility and high inflation expectations, particularly where there is money creation, negative real interest rates and a lack of trust in governments. Yet still, the yellow metal has scarcely moved, save for a very small tick up on the concern about the Omicron virus. As interest rates rise, gold will only become less attractive, because it doesn’t pay a yield, unlike bonds.

The WisdomTree Enhanced Commodity ETF (LSE:WCOB)gives a broad and diversified commodity exposure to energy, agriculture, industrial and precious metals. It is a member of interactive investor’s Super 60 list. An active fund option is the BlackRock World Mining Trust (LSE:BRWM).

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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