Preparing for a period change

THE US economy has been on a path of sustained post-pandemic recovery that we expect to continue into 2022. US growth remains stronger than other developed markets, supported by healthy consumer spending and strong corporate earnings.

While the economic backdrop appears robust, we acknowledge that 2022 might bring an increase in volatility in variables such as inflation, interest rates and the coronavirus that could impact financial markets and affect investor sentiment.

Despite the cross-currents in the market at a macro level, we continue to see opportunities to invest in what we consider to be high-quality businesses with sustainable growth drivers that are not reflected in current valuations. Many of these investments are levered to strong secular growth themes that we believe will deliver consistent performance throughout the market cycle.

Digital transformation: Still early days

Many of our investments remain focused on the ongoing digital transformation of the global economy. This move from an analog-based world to a digital one is allowing companies to better understand customers, improve business processes, increase productivity and lower costs.

Digital transformation is still in the early days of adoption and we are seeing investment opportunities in almost every sector of the economy.

While the pandemic shone a bright light on our thesis, we do not think that this opportunity is over. From digital transformation of the broader market, key investment themes have emerged in healthcare, financial technology, e-commerce and industrials.

During the pandemic, consumers had new options to access healthcare through telemedicine, which allows a patient to connect with treatment providers for routine questions, creating more efficiencies and reducing time spent for an in-person appointment.

Biotechnology and genomics companies have shown tremendous promise with new and innovative treatments and cures, while the medical device and medical technology industries have been investing heavily in research and development to re-imagine the healthcare system of the future. The pandemic also showed us how advances in gene sequencing can lead to faster and better treatments for disease. The expedited research and development process for the Covid-19 vaccine is the result of these genomic advancements.

The rise of many fintech (financial technology) companies and the growth of digital payments and processes are disrupting the traditional banking industry, creating new options for consumers. Fintech trends were already accelerating prior to the pandemic.

A combination of cashless payment systems, mobile banking and challenger banks - smaller banks set up to compete with larger, traditional banks - had already widened access to basic financial services and products.

While companies in the fintech sector were not immune to the effects of Covid-19, we believe the contactless habits spurred by the global pandemic are likely to continue, especially with rapid growth in e-commerce, which has accelerated credit card use and other online payment services that allow for contactless transactions.

We believe businesses that have adapted and created more digital opportunities during the pandemic will continue to do so in the future.

Potential risks

In terms of risks to global financial markets in 2022, the emergence of a vaccine-resistant coronavirus mutation is one we are paying attention to, but it appears we are learning to live with Covid-19. The development of a therapeutic treatment administered orally, a potential game changer for Covid-19 treatment, is encouraging.

The United States appears to be moving into the final stage of the pandemic reopening process - workers returning to offices, schools reopening and spending for travel and services on the rise. Looking ahead to 2022 and beyond, we will be paying close attention to monetary policy changes, inflationary pressures and global supply chains and their impacts on the pace of economic growth that we expect to see next year.

These headwinds may weigh on investors' minds, but we expect many of the impacts to be transitory and abate in the second half of 2022, as supply-demand imbalances moderate.

US growth equities continue to be attractive

We continue to view the US economy as strong and see the US equity market as an attractive place to invest in 2022. While valuations are elevated in some pockets of the market, our focus is on finding quality companies with robust competitive advantages, strong balance sheets and high free cash flows that can weather economic downturns or increased market and economic volatility.

Environment, social and governance (ESG) factors also play an important role in our investment process. As active managers, we view the integration of ESG factors into our fundamental investment process as a key aspect of identifying sustainable growth investment opportunities across all industries.

We believe that active management is critical to successfully navigate these dynamic financial markets. We encourage investors to take a long-term view and see volatility as an opportunity to take advantage of the good prices of excellent companies set to benefit from multi-year secular growth trends. We remain convicted in our growth positioning as we seek to identify companies that we believe can be the future leaders within the US economy and the overall market.

• The writer is senior vice-president and portfolio manager at Franklin Equity Group.