2022 Outlook – U.S. Equities

We are exiting a year characterized by widespread vaccinations, new variants, supply chain challenges and the return of inflation. While initially thought to be transitory, we believe elevated inflation will persist in 2022 and the ability of businesses to navigate this risk will be an important indicator of performance. To combat rising prices on goods from groceries to gasoline, we expect the U.S. Federal Reserve will shift away from many of their policies implemented early in the pandemic to encourage lending and investment. This will likely include interest rate hikes and a tapering of quantitative easing, which could put pressure on equities, particularly businesses with lofty valuations based on high future growth potential or those reliant on debt as the primary component of their capital structure.

Despite the potential for tightening monetary policies, we maintain an optimistic economic outlook entering 2022 for the following reasons:

1. We expect bolstered consumer savings during the pandemic will drive strong spending and the steady easing of supply chain constraints will allow businesses to meet this demand.
2. We are encouraged by the declining unemployment rate, robust business investment, and President Joe Biden’s recently passed US$1 trillion infrastructure bill.
3. While we believe the emergence of new variants may delay a complete return to normalcy, we expect a continued recovery in travel, offices and spending related to in-person activities.

Positioning and opportunities

As fundamental bottom-up investors, we make investment decisions based on company-specific analysis. We favour businesses with:

• Secular tailwinds that can succeed across varying economic environments
• Short-term headwinds trading at prices well-below their intrinsic value
• Consistent track records of cash generation
• Ample opportunities for capital allocation at attractive returns.

To position our funds to outperform in 2022, we have placed a focus on holdings with flexible supply chains and pricing power to avoid pressure from cost inflation. We reduced exposure to businesses with faster growth profiles but elevated valuations and longer timelines until profitability, which typically underperform under higher interest rates. To benefit from the return to in-person activities, we have maintained our allocations to the travel, hospitality and entertainment sectors.

We have a very positive outlook for small-cap names in 2022, which experienced sharper declines during the pandemic because they were less diversified than their large-cap peers. As economic activity continues to recover, we expect these businesses will also experience a sharper rebound. We intend to continue placing a focus on small-cap names over the long term because they are generally able to grow faster than their large-cap peers and are often overlooked, allowing us to invest at a discount to intrinsic value. Finally, we would also note that private buyers are currently flush with cash and are likely to be aggressive on consolidation activity as we are early in an economic cycle. We believe these buyers will bid competitively for undervalued and high-quality businesses, which should provide a floor for public market valuations.

The following companies are attractive within our investment framework:

Berry Global Group, Inc.

Is a leading manufacturer of plastic packaging products for consumer and industrial end markets. We believe the business is well-positioned to consolidate the fragmented speciality plastics industry because of its substantial scale and exposure to numerous markets. Berry Global has proven its ability to pass through prices to customers, which insulates profitability from volatility in the cost of raw materials. We also believe the company trades at an unmerited discount to other public plastic producers and this discrepancy may attract a multitude of buyers willing to take the business private.

Live Nation Entertainment, Inc.

Distributes tickets for live events, such as concerts and sports, and provides services including event promotions, acting as managers for artists, venue operations and facilitating sponsorships. While the business experienced a very steep decline during the pandemic due to lockdown restrictions, we anticipate a strong recovery driven by pent-up demand to attend live events and bolstered levels of consumer savings. We also view Live Nation as an attractive business because of its leading market share and unparalleled breadth of services across the live event value chain.

Risks

We actively monitor risks and have positioned our funds to outperform under a number of market conditions. While we have witnessed a partial return to normalcy this year, the emergence of new variants remains a key risk in 2022. It is uncertain whether current vaccines will provide sufficient protection against new variants and whether restrictions on travel or in-person activities may return to some extent. The possibility of elevated inflation and supply chain disruptions persisting pose another significant risk and will be most damaging to businesses lacking pricing power. It is probable inflation will cause monetary policy tightening, which may pressure equity valuations. We are also monitoring U.S.-China trade tensions, volatility in energy and commodity prices, and record high federal debt levels, which increase the likelihood of higher taxation.

Despite these risks, we remain fully invested and are optimistic on the outlook for the U.S. economy and equity markets in 2022.

Glossary

Quantitative easing: monetary policy whereby central banks increase money supply in the markets to encourage lending and investment.

IMPORTANT DISCLAIMERS

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.

The opinions expressed in the communication are solely those of the author(s) and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.

CI Global Asset Management is a registered business name of CI Investments Inc.

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Published January 17, 2022