Hermes GPE / Insights / Peter Gale’s outlook for 2022

Peter Gale’s outlook for 2022

Psychologists use the concept of a habit loop  – a cue, a routine, and a reward  – to contextualise behavioural changes.  This very neatly applies to the changes we have seen in business behaviour over the last two years, and are equally applicable to the future.  2020 was the year where new habits – think operating in the virtual economy – were initiated and became routine, while 2021 was the year those new habits got rewarded: Companies that adapted to the new realities of the virtual economy prospered, while old business models saw accelerated decline. Investors now need to look ahead to identify the next transformative phase, and position their portfolios accordingly as we move into 2022.

There can be no doubt that the next defining investment (and societal) habit will be the transformation, over the next decade, to a Net Zero Economy environment. Much like the digital transformation of the last decade, the Net Zero Economy transformation will require companies, consumers and governments to rethink and change the way they operate across an entire spectrum of economic activity. This will give rise to compelling new business opportunities for innovative companies.  Excitingly, we believe the majority of the economic transformation can be achieved by applying existing technology to new problems and scaling those solutions into new markets. The rewards for investors who embrace the upcoming transformation to a Net Zero Economy will be the capture of powerful long-term tailwinds across industries, ranging from next-generation energy, to food & farming technology, to accelerating themes around the circular economy and responsible consumers, and the required upgrading of supply chains.

While these structural observations are set against the context of record-high valuations, and the real risk of an inflationary uptick, the opportunity set for investors who take a disciplined, research-driven, and diligent approach to stock selection, has never been greater.  At the same time, we believe it is important to take advantage of the elevated valuation environment, where possible, and to be alert to the speed of potential disruption affecting even successful businesses. On that basis we will continue to actively drive exits across our clients’ portfolios to minimise downside risks and ensure optimal allocations to this decade’s most relevant growth trends.

~ Peter Gale, CIO and Head of Private Equity