Conversation for August 23, 2022

Surging Inflation and Impending Recession Characterize the First Half of 2022

The first half of 2022 has been active for investors, with inflation and recessionary fears top of mind across all sectors. Our Ninepoint Portfolio Managers recently released commentaries on what the first half of 2022 meant for investors in the energy, fixed income and infrastructure & real estate sectors. Here’s what they had to say.

Energy Markets: The Disparity Between the Physical Demand and the Financial Demand For Oil

The impact of the Russian invasion of Ukraine, European energy policy and concerns about OPEC’s spare capacity exhaustion were key factors affecting the sector during the first half of the year.

Eric Nuttall, portfolio manager of Ninepoint’s Energy Fund remains bullish on the energy market, noting the increasing global demand for oil as the worldwide economic engine accelerates again post-pandemic, particularly as China emerges from lockdown. Oil producers aren’t increasing output at a rate that can keep up with demand, and expectations are that it will take years before they’re able to significantly ramp up production. This is only exacerbating the supply/demand gap. The fundamentals of the global market points to what we believe to be an unvalued oil market and strong prices for the foreseeable future.

Read more about what the disparity between physical demand for oil and the financial demand for oil means for energy investors in Eric Nuttall’s full H1’22 Commentary on the energy market and register for Eric’s live Energy Strategy Update webinar on September 21 at 1pm ET.

A Challenging Fixed Income Environment

2022 has been a challenging environment for most asset classes, with jumps in inflation impacting economic growth.

While central banks are raising rates aggressively to combat surging inflation, economic growth is not as weak as originally anticipated, unemployment is at record low and corporate earnings have been better than expected. The impact of increased interest rates is being felt in a number of sectors, however, including housing, where the market is beginning to cool as potential buyers qualify for lower mortgage amounts.

Mark Wisniewski, portfolio manager of Ninepoint’s Diversified Bond Fund, Credit Income Opportunities and Alternative Credit Opportunities Fund, views this as an opportune time to look at fixed income, as yields will likely be attractive for at least the next two years.

Credit hedges are also proving to be useful, protecting against volatility in portfolios. As we move into a mild recession, increased risk of default is built into the credit spreads, so the difference in interest rate gained between government and corporate bonds is more significant. This increased credit spread translates into the potential for increased yield for portfolios.

Read more commentary from Mark Wisniewski about how the fixed income markets performed in H1’22.

A Market Selloff in Global Infrastructure and Real Estate

The combined impact of the Covid-19 Omicron variant, additional lockdowns in China and the Russian invasion of the Ukraine all exacerbated inflationary pressures and weighed on global growth, triggering a market selloff and an official bear market. Given an investment environment characterized by moderate inflation and slowing growth, it’s not surprising that infrastructure has outperformed. But Jeff Sayer, portfolio manager of the Ninepoint Global Infrastructure Fund and Ninepoint Global Real Estate Fund, is somewhat disappointed that real estate has underperformed. Despite both asset classes offering a nice combination of inflation protection and income generation, investors have gravitated toward infrastructure but have shied away from real estate based on fears of a looming recession.

The fundamentals of most of the underlying businesses have been steady, and the dividend yields remain attractive, so Jeff Sayer expects the potential for better relative performance from both sectors over the balance of the year.

Read more commentary on the H1’22 infrastructure and real estate market.

Ultra-High Net Worth and Family Office Investors are Delving into Private Debt

In this current economic environment, interest in private debt investing is growing at a stronger rate than ever before. According to recent studies - including the 2022 Global Family Office Report by UBS, Preqin quarterly reports and a poll from the Alternative Credit Council of the Alternative Investment Management Association – this growing interest shows no signs of slowing.

Read more in this article: Why UHNW and family office investors are delving into private debt.