2022 Outlook

Jason Brady shares his views on surprises, opportunities and risks as we turn the calendar to 2022.

I think the biggest lesson of 2021 has been market resilience. Most asset managers anticipated faster growth in the context of reopening after the pandemic-induced lockdowns and closures of 2020, as well as the rapid pace of vaccinations. But what we got instead was a series of hits to that growth trajectory. Whether it was the delta variant (and now Omicron), then the massive disruption to the global supply chain and then, a whole lot of inflation and persistent inflation. Yet the growth trajectory of the U.S. and global economies remained resilient. Despite all these shocks, we really saw very, very low volatility at least in risk assets. And even in rates markets, bouts of volatility have been relatively quiescent, so I think the biggest surprise is that there haven’t really been any surprises.

I do not expect growth to remain strong or as steadily resilient as it was in 2021 as monetary and fiscal stimulus wanes. Companies have been able to pass along price hikes, due to a very strong consumer balance sheet and pent-up demand. But now wages are growing slower than goods prices, and even with wage hikes I suspect that rate of change will slow. I think this has the potential at least for a “mid-cycle” slowdown, though it feels more like we have a series of mini cycles of late.

On the U.S. fiscal side, although the recent passage of the roughly $1.5 trillion infrastructure bill may be viewed as near-term stimulus, we can look back on the stimulus passed in the in the wake of the “Great Financial Crisis” and recall the phrase ‘shovel ready projects.’ Well, as it turned the shovels were not particularly ready. So while the infrastructure bill sounds great, it’s not a big amount of short-term fiscal stimulus, certainly versus stimulative impact of handing out a lot of checks to people who have a relatively higher propensity to spend. A whole swath of these direct payments begins to fade in 2022. So fiscal stimulus in 2022 will likely underperform expectations and headline GDP growth should slow as a result.

Headline GDP growth will also be dented by monetary headwinds. The Fed in 2021 adopted a new reaction function and is essentially running an experiment on the U.S. economy. The Fed has been fast to add foundation to the U.S. economy, but slow to reverse that stimulus. Well, they began tapering its regular monthly bond purchases and, being slower to reach, is now likely to conclude this cycle several months earlier than the previously announced target of June 2022. This makes sense because I think the Fed got pretty far behind with regard to keeping inflation in check.

What makes the prospect of outright Fed tightening so interesting is that a lot of the market and the economy are geared towards lower rates. So actually, the biggest risk is to risk assets that are very much levered to low rates.

Developing markets are of interest, especially China. Beijing has already pulled back on a lot of covid-related stimulus and finds itself about six to eight months ahead of the U.S. in this changing cycle. They had a less exciting year this year and depending on how covid and other geopolitical and real estate issues resolve themselves, China could be an interesting area to monitor for opportunities.

Europe remains a more difficult place to invest from an equity perspective.  You have much more in terms of cyclicals and much less in terms of tech. That said, there are some interesting pockets in terms of valuations. But the U.S. and China are the most innovative places in the world, and they can produce companies and they can grow companies, despite some of the headwinds we talked about.

We’ve seen equity markets rocket up over the course of the last 18 months and you haven’t seen a correction of 10% during that time. Now you see the removal of stimulus or increasing headwinds or fewer tailwinds. As a result, I think markets will be more volatile in 2022 than 2021. But for an active manager, volatility can provide opportunity to purchase what we believe are attractive equities and securities at more appealing prices. Looking at risk, the inflation threat is probably pretty well priced into the market. But slowing growth is less so and that is a risk.

I see 2018 as a possible parallel to what may occur next year. In 2018 the U.S. economy slowed as Fed tightening drove the 10-year Treasury yield, which went to and through 3%. To me, this indicates a speed limit to what the economy can withstand. So it’s a real question how much rates can rise, either on the front end by the Fed, or on the back end by the market before you start to see real knock-on effects on areas like housing. In 2018, bonds dragged stocks lower, in particular large-cap growth stocks, which caused a turnaround in policy from the Powell Fed. We could see a replay of that in 2022 as the Fed likely tightens rates. But the indebtedness of the corporate sector, which to me is much scarier than the consumer sector, is where I see volatility stemming from. This may prove to be the wildcard of 2022.

Co-Head of Investments, Ben Kirby, shares his views on the biggest opportunities and challenges in 2022.

With 2021 in the rear-view mirror, what are the biggest lessons you’ve learned over the past year? Did anything take you by surprise?

The biggest surprise in 2021 was the rapid recovery in economic activity and the attendant spike in inflation in durable goods. U.S. companies performed strongly, largely passing on higher costs and growing earnings by more than 50% for the full year. It’s worth noting that it only took about a year and a half for U.S. companies to recover their earnings level from the slippage of 2020, and that they are now trending well above their pre-COVID-19 levels. To highlight how remarkable this is, after the global financial crisis of 2008-2009 it took roughly seven years for these numbers to get back to trendline growth. The level of earnings growth and financial-market recovery seen in the U.S. over the past year has been unprecedented as seen in the chart below.

Trend in S&P 500 Best EPS vs. Price

Source: Bloomberg

Looking ahead to next year, what are your expectations for economic growth in 2022 and what does this mean for U.S. equities? 

We witnessed supply-chain issues in 2020 that worsened over the past year, and many companies experienced an inventory run down to very low levels. As a result, in 2022 we expect a major restocking-and-destocking trend on the supply side. Companies will replenish their inventory to healthier levels and the supply bottleneck will be largely worked out over the next year, thus easing pent-up consumer demand. So when you think about a traditional business cycle, the “restock-and-destock” inventory event can become a really important growth driver, and we expect to see it spur an acceptable level of GDP growth next year. The big question is whether this will be enough to deliver a sustainable growth trajectory throughout the rest of 2022, or if the trend will peter out as the year goes on. With all things considered, we’re bullish on U.S. economic growth and stock-market performance next year. But we believe 2022 growth will likely be lower versus the rock star year of 2021, and that we’ll see increased volatility in equities due to overall tightening of the markets.

How have inflationary risks and the potential for rate hikes impacted your portfolio positioning?

The Federal Reserve has been in denial about inflationary pressures building over the course of the year, and only recently backed away from their “transitory” language. While we believe durable goods inflation exacerbated by supply chain constraints may ease in 2022, we believe there are at least three longer term drivers of above average inflation: owner equivalent rent rising with a lag to home rising home prices, wage-price spiral as bargaining power has shifted to labor, and the energy / low carbon transition, which will require trillions of dollars in capital investment and drive higher energy costs in the medium term. We’re through with the easy money part of this economic cycle, and the Fed, already behind the curve, may be forced to hike rates more aggressively than previously believed.

From a portfolio-strategy perspective, that means growth stocks are unlikely to be winners in 2022, and this is especially true for aggressive growth companies that have low or no net profit. With inflationary pressures set to persist through next year, we are underweight higher-growth emerging franchises and instead favor strong businesses that have consistent, stable earnings and attractive valuations. We also think companies that have strong pricing power will be better positioned to pass inflationary pressures to the consumer and to maintain revenues. Higher-margin companies for which labor is not a major component of input costs will also fare better in a rising-wage environment.

As an example, payment-network names will be less impacted by inflation because their revenues are tied to transaction volume. These types of companies will have the ability to grow with inflation in the long term. Companies with the ability to make money despite the upward inflation pressure will be better positioned overall. We see such companies not only among financials and banks, but also in consumer discretionary and technology. Lastly, in a rising-labor-costs future there’ll be huge demand for labor-saving technologies, and that will breed new investment opportunities in the automation and semiconductor space.

What are the risks worth keeping an eye on in 2022? What’s keeping you up at night?

As world economies become more interconnected and interdependent, a key risk lies in adverse geopolitical events such as the China-Taiwan divide. These sorts of risks aren’t getting as much attention as they deserve, even though they can have huge implications even for a U.S. equity portfolio. As an example, Taiwanese firms are among  the world’s largest contract manufacturers of semiconductor chips that power just about everything global consumers interface with on a daily basis — phones, laptops, cars, watches, refrigerators and much more. The world depends on Taiwan for semiconductors, and the country plays a significant role in the digital-transformation age that we’re living through. If the China-Taiwan tensions result in any disruption on the manufacturing side there could be significant shocks, not only in the semiconductor space but across the global economy. And that’s only one example — so U.S. portfolio managers need to be keenly aware of this overall geopolitical risk factor.

Co-Head of Investments, Jeff Klingelhofer, shares his view on the biggest opportunities and challenges in 2022.

With 2021 in the rear-view mirror, what are the biggest lessons you’ve learned over the past year? Did anything take you by surprise?

Navigating 2020 was not an easy feat, but after coming to grips with a global pandemic — and with the assistance from fiscal and monetary policy-makers around the world — the global economy and financial markets not only regained their footing but delivered extraordinary 2021 results that astonished investors. The biggest lesson in 2021 was that we should never discount the market’s ability to rally in the face of unknowns and adversity. The other lesson was to never discount the consumer’s ability to power the economy and drive company earnings growth: Bolstered by rounds of relief checks from the federal government, in the first half of 2021 consumer spending quickly recovered from its modest 2020 contraction and became the clear driver of economic growth.

Turning to fixed income specifically, the bond markets likewise did not follow the script many had expected. Buoyed by the central bank’s accommodative policies, as well as the government’s multi-trillion-dollar pandemic relief package, credit spreads between U.S. corporate debt and Treasuries dropped to their lowest levels in more than a decade. A similar story held true for the high-yield bonds, where spreads collapsed and prices rallied.

Looking ahead to next year, what are your expectations for inflation and economic growth in 2022? 

Our perspective is that inflation has been broadly a transitory phenomenon, as we expect supply bottlenecks to heal to some degree in 2022 — although not dramatically. We also believe consumption demand will slow, as consumers have long ago tapped into their stimulus checks and personal savings levels are decreasing. Taken together, the supply-demand imbalance seen in the past year will improve, but wages will likely remain higher. So, we expect overall inflation to remain elevated, but it should begin to soften and remain moderate in 2022. Our expectations for economic growth next year will hinge on these questions: How fast will the labor market heal? And will the labor-market recovery be robust enough to replace the stimulus payments that will be fading away? We are cautiously optimistic that the current economic recovery will continue well into the new year, but that it will slow down due to structural headwinds in 2022, such as waning savings and easing of pent-up consumer demand.

Inflation Projected to Increase but to Remain Moderate in 2022

Source: OECD (2021), OECD Economic Outlook, Volume 2021 Issue 1

How have inflationary risks and the potential for rate hikes impacted your portfolio positioning?

It remains to be seen whether inflationary pressures absolutely mean higher rates next year. The driving cause of inflation is critically important to understand when it comes to determining how quickly and by how much the Fed will raise rates — and in this case we think this will largely depend on whether inflation is predominantly driven by rising wages or by the ongoing supply-demand imbalances. If it’s the former, we think the labor market will be able to sustain higher wages than those of pre-COVID-19, as we’re coming off multiple decades of suppressed wages. Higher overall labor costs will feed into higher inflation, but not by a lot. On the other hand, if inflation is driven more by supply-demand imbalances and persists, we believe the Fed will act more aggressively to rein in inflation and won’t allow the markets to run hot. At the end of November, the Fed Chairman as well as other officials retired using the word “transitory” to describe the US inflation situation.  We expect the Fed will be closely watching incoming data and will react appropriately to prevent run away inflation.

With rising rates set to knock on the door in 2022, many investors are questioning the role of fixed income. We continue to believe that bonds have had a long history of serving as a ballast in a portfolio during risk-off periods and that they can continue doing so by providing downside protection and diversification. We have therefore adjusted our portfolio positioning to be more defensive: We are favoring shorter-duration opportunities and will be even more discerning with our credit selections. For example, over the past couple years US investment grade issuance has doubled and companies have taken on meaningful amounts of debt due to the ultra-low interest rates. It will be more important than ever to select corporate credits from companies with strong cash flows that can service their debt coming out of the pandemic. We currently see opportunities in securitized markets that are backed by healthy U.S. consumer spending.

What are the risks worth keeping an eye on in 2022? What’s keeping you up at night?

Return forecasts will be arguably low going forward compared to previous environments where investors enjoyed double digit returns from equity markets for many years. The returns seen over the past years are not sustainable in the medium term.  So the key risk lies in these concerns: How will investors prosper in an environment where we are unwinding from 30 years of falling fixed income rates and how do you continue to generate attractive returns? It will take a great deal of creativity to deliver positive outcomes for our clients and active managers will be best suited to meet that challenge.

Emerging markets portfolio managers, Charlie Wilson and Josh Rubin, share their view on the opportunities and challenges in 2022.

Looking ahead to next year, what are your expectations for economic growth in 2022 and what does this mean for emerging equities?  Where do you see the most exciting opportunities?

Despite the noted political uncertainties and headwinds in Latin America and Asia, we believe there will be stable or strengthening economic growth across emerging markets in 2022. In fact, based on OECD 2022 economic outlook, the real GDP growth estimates for emerging markets, such China, India, and Brazil exceeds those of the U.S. and Eurozone. This is in line with our own research, which indicates that there are tremendous growth opportunities across a variety of emerging countries and sectors. In particular, we think that next-generation growth drivers, including “leapfrogging technologies” and increased economic formalization, are going to play a crucial role not only in reshaping emerging economies but also improve the quality of the underlying investment opportunities in these countries.

First, major fintech disruptions are happening very consistently across almost all emerging markets — a phenomenon that has brought about more financial inclusion and equality. Previously, in certain emerging countries 50% to 70% of the population would be living in an area without access to a bank branch. The global proliferation of smart phones has enabled mobile banking solutions, where people now have the ability to open bank accounts, invest, and borrow all on their phones.  This has eased the need for branch-based banking and significantly reduced customer acquisition costs for banks.  These types of “leapfrog technologies” have not only modernized the financial sector within emerging markets, but also in other industries such as transportation, manufacturing, healthcare, and clean energy.

Secondly, over the past decade more than a billion people in developing countries have entered the middle class, and many more will join their ranks over the coming years. Overall healthier demographics and rising income levels of the growing middle class have created durable, persistent demand for goods and services that will further support the “new economy” growth model led by domestic consumption.

Finally, after being disproportionally impacted by Covid-19 in 2021, emerging countries have gained better accessibility to vaccines and rates of vaccinations have increased significantly compared to a year ago.  Given this trend, we think many more emerging countries will be in a better position to fully reopen their economies in 2022 and enjoy economic recovery and growth.

Share of People Vaccinated against Covid-19

Source: Official data collated by Our World in Data
Data as of December 10, 2021 except China (as of November 19, 2021)

All of these new developments highlight the myriad opportunities being created in emerging-market countries. As active managers we need to be discerning of these trends in order to select the companies that we believe are poised to be the greatest beneficiaries of these changes.

With 2021 in the rear-view mirror, what are the biggest lessons you’ve learned over the past year? Did anything take you by surprise?

In emerging markets, there’s rarely a dull moment — investors in this space have to always expect and prepare for political events, economic crisis, key elections or social challenges that may quickly turn into a key risk or opportunity. In our view, geopolitical risk is an ongoing challenge for emerging markets. That said, the impact of government politics across various countries has been an especially big surprise in 2021.

First, governments around the world are pursuing revised fiscal policies and more aggressive regulatory enforcement on mineral-extraction industries. The copper-producing nations in Latin America, such as Peru and Chile, are at the forefront of this trend. Peru, in particular, has experienced unprecedented political instability in recent years, and the polarizing election results over the summer have sparked controversy and disrupted the mining sector. Consequently, development and expansion projects for copper miners have ground to a halt, and we see this as likely to jeopardize the world’s electrification efforts.

Another 2021 surprise came in the level and scope of new regulations out of the Chinese Communist Party (CCP) when they celebrated its 100^th anniversary. For example, several new measures were announced to address affordability of healthcare and housing, among other issues, as part of China’s common prosperity initiative. China also clamped down on technology and private education amid a broader push to curb monopolistic behavior. All of this has left investors skittish and wondering if more regulations are on their way, and we believe the Chinese government’s lack of transparency in their regulatory decision-making process will spur more uncertainty and volatility in 2022.

What are the risks worth keeping an eye on in 2022? What’s keeping you up at night?

We see a couple of risks worth noting.  The first is U.S. monetary policy and how that may impact global growth and drive forex volatility. The dollar has rebounded smartly from the pandemic lows established about a year ago and is already pressuring emerging market nations with financing challenges such as Brazil and Turkey.

Secondly, inflationary pressures were a prominent theme in 2021. However, we think inflation pressures have been primarily due to supply-and-demand imbalances driven by Covid-related disruptions, and was exacerbated by the record amount of government stimulus deployed to avoid a global recession.  While we think market uncertainty will remain elevated entering 2022, we expect supply chain bottlenecks to ease as demand shifts from manufactured goods to services when emerging countries begin to fully reopen their economies due to higher accessibility to vaccines compared to a year ago.

As an emerging-markets investor, one should always expect the unexpected. Our goal at Thornburg is to find strong businesses that can weather the storm when the unexpected occurs. Whether we are in an up or down-market environment, we aim to build a portfolio, company by company, that can successfully navigate the inevitable surprises on the horizon.

U.S. municipal bond portfolio managers Eve Lando, David Ashley and John Bonnell, share what they think are the opportunities and challenges in 2022.

With 2021 in the rear-view mirror, what are the biggest lessons you’ve learned over the past year? Did anything take you by surprise?

States and municipalities entered 2021 planning for significant budget cuts and anticipating using reserves to absorb lost revenue from the economic shutdown. Surprisingly, tax revenues remained strong and municipal bond credit quality improved uniformly across sectors. In our view, several factors have played a role in the resiliency of the municipal markets over the past year.

First, municipals benefited from a strong economic expansion over the past decade and came into 2021 rich in cash reserves. Second, despite the global shutdown we didn’t see income, sales or property tax revenues take as much of a hit as one might have expected. Despite job losses in certain sectors, a significant part of the workforce was able to successfully transition from working in an office to working from home, and that allowed personal income tax collection to remain strong. Sales tax collection was also healthy: States are now able to tax online purchases, so these revenues remained robust even as consumers migrated from brick-and-motor stores to internet shopping. Lastly, real estate did phenomenally well in some parts of the country and delivered strong property tax revenues. Altogether, cash collection was solid and stable across all three revenue fronts — personal, sales, and property tax — and kept overall state revenues strong. That, in turn, has improved municipal bond credit quality and lifted municipal market performance in 2021.

State and Local Government Current Tax Receipts

Source: U.S. Bureau of Economic Analysis

Looking ahead to next year, what are your expectations for economic growth in 2022 and what does this mean for the municipal bond market? 

Going into 2022, we have a positive outlook for municipal bonds relative to other fixed income alternatives.  We expect continued growth backed by a strong consumer as well as the beginnings of the long-awaited infrastructure plan. Since many of the types of projects included in the infrastructure bill have traditionally been financed through the municipal market, we anticipate another strong year of municipal issuance in 2022. This would be a welcomed event by municipal investors, given the extremely high demand for municipal bonds we saw last year, and we expect the demand to continue into 2022. In addition, the possibility of higher tax rates in the future also adds another dimension of attractiveness of tax-exempt interest income.  All of these developments will ultimately produce additional opportunities for active municipal bond managers to identify more relative value opportunities and capture incremental income.

How has your portfolio positioning been impacted by inflationary risks and the potential for impending rate hikes?

We do not aim to predict the movements of macro factors such as where interest rates or credit spreads will be. The reality is that no one has a crystal ball and market timing is a difficult endeavor. Although we do not attempt to time the market, we are still hyper conscious about the exceptionally low-rate environment we’ve been in, and we recognize that will change. That said, we’ve carefully constructed our portfolio with municipal issues that we believe can withstand sudden changes in rates and spreads. In fact, we welcome a higher-rate environment since all income investors have been starved for yield for quite some time.

Due to this prolonged period of ultra-low interest rates, combined with real rates driven to negative territory by higher inflation, we have been cautious of adding duration. These have offered us more attractive relative-value opportunities versus our benchmarks, and selecting issues at the shorter end of the curve will also allow us to capture more upside if credit spreads suddenly widen. Additionally, since spreads have been very narrow, we have preferred higher-quality credits over lower-quality ones. And we have invested in more floating-rate notes, which will serve as a buffer to protect the short end of our portfolio if rates move higher.

What are the risks worth keeping an eye on in 2022? What’s keeping you up at night?

As bond managers we are always looking at risk, especially those relating to inflation and credit-spread-widening events. However, we are also keeping a close eye on potential structural changes that could have a lasting negative impact on established municipal issuers — particularly those hardest hit by the pandemic, such as educational institutions, hospitality and convention centers, to name a few. As an example, COVID-19 has accelerated the need for schools to rethink their education-delivery models and many have shifted toward expanding their digital learning environments. How may this switch to online learning impact the amount of tuition fees a university can command going forward? The pandemic also generally brought global gatherings to a sudden halt, emptying convention centers and shuttering the hotels around them. Although in-person business meetings are on the rebound in 2021, going forward many of these could reasonably be replaced by Zoom calls, which are far more cost efficient. Will this be an ongoing concern for convention centers and hotels?

Lastly, we are keeping a close eye on the environmental, social and governance (ESG) risks that are becoming more prominent these days. Municipalities are increasingly dealing with hurricanes, floods, wildfires and extreme weather — events that are happening more frequently today than they were in the past. As we evaluate the strength and quality of a given issuer, we want to be mindful of whether it is sufficiently preparing and planning for these types of events and whether it would have enough reserves to weather the storm.

As sustainable investing has become relatively entrenched in Europe and is becoming more mainstream in the U.S., many asset managers have been actively integrating ESG considerations into their investment processes. There are many ways to do this. What is Thornburg’s approach?

Snapshot of Global Sustainable Investing

Source: Global Sustainable Investment Review 2020

NOTE: Asset values are expressed in billions of US dollars. Assets for 2016 were reported as of 31/12/2015 for all regions except Japan as of 31/03/2016. Assets for 2018 were reported as of 31/12/2017 for all regions except Japan, which reported as of 31/03/2018. Assets for 2020 were reported as of 31/12/2019 for all regions except Japan, which reported as of 31/03/2020. Conversions from local currencies to US dollars were at the exchange rates prevailing at the date of reporting. In 2020, Europe includes Austria, Belgium, Bulgaria, Denmark, France, Germany, Greece, Italy, Spain, Netherlands, Poland, Portugal, Slovenia, Sweden, the UK, Norway, Switzerland, Liechtenstein. Europe and Australasia have enacted significant changes in the way sustainable investment is defined in these regions, so direct comparisons between regions and with previous versions of this report are not easily made.

Our philosophy centers first and foremost around appreciating the complexity of the world and the ESG issues that exist.  As investors with the goal of supporting the transition to a more sustainable world, the most important thing is the ability to determine the materiality of ESG factors— in other words, teasing out material ESG factors that stand to significantly impact a company’s long-term performance. In contrast to this, there are salient ESG issues that may be anecdotally and morally important, such as human rights issues, but does not currently impact the financial performance of a company in a consistent or well understood way.  So, the question then becomes: How does one determine materiality?

At Thornburg, we think the best approach is to first leverage the expertise of the Sustainability Accounting Standards Board (SASB) as a starting point to guide us toward the most material and actionable ESG factors. From there, we overlay our own internal analysis and research to develop a holistic ESG viewpoint on individual companies we’re interested in. Due to our commitment to the ESG space, we have a team of ESG specialists that work collaboratively and organically with our investment team. As partners, our portfolio managers, analysts, and ESG specialists discuss how we can invest in a more responsible manner while simultaneously delivering excess returns for our clients.

How big of a role do you think ESG factors, such as climate risk, generally play in determining a company’s financial performance?

Carbon emissions are likely one of the most universally material current ESG factors that can alter a company’s ESG profile. In an effort to rapidly cut emissions, many countries are turning toward policy tools, such as levying a carbon tax, in order to encourage companies to adapt and make meaningful changes to reduce their carbon footprint. While the U.S. may not be close to imposing a carbon tax, American companies from all sectors are facing pressures to reduce emissions. In this instance, the combination of tighter government regulations and increased penalties has transformed climate risk into a source of business risk for companies, which then translates into a level of investment risk for investors as well.

From a financial-performance perspective, we do not expect ESG factors to have an immediate influence on a company’s stock — any related drag on a company’s earnings or share price will be fairly incremental, occurring over an extended period of time. The exception may be such unpredictable idiosyncratic risks as petrochemical disasters, like a major oil spill, which can result in short-term abnormal losses for a company.

How useful are third-party ESG data and ratings, and do you use them as part of your process?

As interest grows in ESG criteria, investors increasingly need a way to access an objective assessment of a company’s ESG performance. While we believe ESG data can be useful in helping investors identify financially material ESG risks to a business, there’s no single data point that can inform us whether a company is a good or bad ESG citizen. Accordingly, a comprehensive ESG assessment needs to incorporate both quantitative and qualitative information about a company’s current and forward-looking ESG strategy and goals. Managers with strong commitment towards ESG investing excellence, like the one we have at Thornburg, will be better positioned to do this and can provide a richer picture of a company’s current and future ESG impact. While we leverage third-party ESG data as a starting point, we rely on our own internal research to determine our forward-looking ESG viewpoints on companies.

For example, some companies that we see as opportunities may not be obvious “good” ESG companies today, but they have the potential to be tremendously impactful in the future when it comes to moving along such ESG goals as mitigating climate risk. We believe that understanding how a company helps the transition to a more sustainable future is more important than its ESG score or label at a particular point in time.

Do you see any transformative technological innovations on the horizon? What are the key opportunities and risks to keep an eye on?

Financial markets have witnessed a general mindset shift from concern around managing ESG risks to a more opportunistic and return-driven approach: finding companies that will take on the role of creating value in this sustainability era. We think there are many potentially transformative innovations scattered across a variety of industries that have the potential to solve huge sustainability issues.

As an example, there is strong demand for a wide variety of clean-energy technologies, and these will be needed to decarbonize many parts of the economy. The electrification of cars is a popular technology that has gained a lot of traction over the years, although other promising developments include the use of hydrogen as a renewable energy source. Hydrogen, when produced sustainably hydrogen can be used as a high-efficiency fuel that has little to no environmental impact. And wind, solar, and even nuclear energy are all opportunities on the table that deserve close attention.