During the depths of the pandemic, many of us worried about scarcity: What if a battered, disrupted economy left us with too little? In contrast, when the panelists on our annual investor roundtable gathered to talk about 2022, in the context of a roaring U.S. recovery, many were grappling with the challenges of too much. Too much demand for consumer goods, tangling supply chains and stoking inflation; too much money sloshing around in Silicon Valley and on Wall Street, making startups and stocks look overvalued; and on a far more sober note, too much carbon dioxide in the atmosphere, posing difficult choices about sustainability for CEOs, investors, and consumers alike. No surprise, then, that each of our experts is on the hunt for companies that have the business models and the technology to adapt to a fast-changing world.
Joining us on this year’s panel were Dan Chung, the CEO, chief investment officer, and portfolio manager at Fred Alger Management; Leslie Feinzaig, the founder and managing director at venture capital firm Graham & Walker; David Giroux, chief investment officer for equity and multi-asset at T. Rowe Price and author of the new book Capital Allocation: Principles, Strategies, and Processes for Creating Long-Term Shareholder Value; Lori Keith, director of research and portfolio manager at Parnassus Investments; and Katie Koch, cohead of fundamental equity at Goldman Sachs Asset Management. What follows are edited excerpts from our conversation; read more at Fortune.com.
Fortune: We’ve been through this incredible rebound year, but now we’re starting to see new headwinds, whether it’s inflation, labor and supply-chain problems, or the end of government stimulus. Is 2022 a year when you see equities in general cooling off?
Katie Koch: Big picture, we think of 2022 as a year of transitioning from recovery to more resilience, where returns will be more muted. And we’re going to have to be highly selective against that backdrop. So in terms of resilience, areas where we’re looking to invest would include the reshoring of supply chains, which we all have discovered this year need to be more resilient; digitalization of businesses; and finally, investing in the transition to a more sustainable planet.
Early in the pandemic, the benefits of digitalization seemed to flow mostly to Big Tech. Are we seeing some of that business flow to lesser-known names or smaller companies?
Dan Chung: The massive acceleration in the adoption of technology, in some ways, was a forced experiment for a lot of stakeholders. But the experience, I think, by and large has been very positive—including in some much older industries. So for example, among restaurants, the most hard-hit industry other than airlines, many pivoted to delivery and online ordering. And the results are really quite amazing. For many of them, they’re seeing that even as we reopen, their delivery efforts are actually holding up quite a bit better; they’re above the levels where they were before COVID.
Leslie Feinzaig: Building on that point, I think that in times of great disruption comes great opportunity. And we’ve had a major disruption in how we live and work and plan to do everything, and behavior hasn’t settled into what the new normal will be. A lot of VCs were very cautious about the education industry before the pandemic. And now as we realize that there are so many different ways of delivering education, we’re starting to see record investing. Personally, I’m invested in a couple of companies in the space. One is LegUp, which helps parents connect with early childhood education suppliers, and the other is Stack Education, which is delivering upskilling and rescaling programs through community colleges in the middle of America.
I’m also seeing a lot of innovation around models for delivering health care differently. Now that insurance covers a lot more telehealth, it’s a lot more widely acceptable. Now you can just book an appointment and get on with your day. All of the extra thoughtfulness that people have had, for better or worse, around personal health through the pandemic is creating all of these opportunities for spaces that venture capital has never touched before. I don’t think we’d be seeing this much traction if it weren’t for the great disruption of our lives over the past couple of years.
Koch: That disruption in venture extends into the public markets too. And we expect some of the big winners in tech next year and beyond actually to be outside of those dominant platforms that are listed in the U.S.
If you think about the largest companies in the world by market cap 20 years ago and compare that to today, there’s only one company that’s still on that list, which is Microsoft. Those other nine companies since then have lost a cumulative $235 billion of market cap. And so this speaks to the importance of finding the next generation of companies.
We think that enterprise spending on tech could be up 4% next year, which would be the highest projected growth rate in 10 years. And some areas that we’re looking at include cybersecurity, as people move workloads from the edge of the network to the cloud. Palo Alto Networks would be a company that’s going to be at the leading edge of that. In software, HubSpot, one that we like, is helping to basically digitalize aspects of small and midsize businesses in the U.S.
There’s a big technological side as well to climate-change–related thinking and making companies’ operations greener.
Lori Keith: Absolutely. One company I’d highlight that is helping companies reduce their water use is Roper Technologies. They’re a diversified technology company that develops software-engineered products for a variety of niche markets. But they’ve been providing very innovative water pumps that allow their customers to use significantly less water and to monitor that water quality.
Another, maybe less obvious, candidate with this theme is Guidewire Software. Certainly, it also plays into the digitalization trend that Katie and Dan have spoken on. The physical risk of climate change is driving really dramatic costs in property insurance. Guidewire’s software and data analytics are helping its customers to manage these risks, handling these mission-critical climate-change issues.
David Giroux: If you think about utilities, probably over the next 20 years, there’s going to be no sector that’s going to play a bigger part in essentially reducing greenhouse gases. What you’re seeing the utilities do today is basically replace coal and less-efficient natural-gas plants with wind and solar. But the issue is what happens when you go from baseload generation that’s very predictable, like coal, like nuclear, like natural gas, to generation with wind and solar, which is more variable. To make this clean-energy economy work, we estimate you may need as much as $400 billion spent on new transmission projects in this country by 2040.
A good chunk of that going to be in the Midwest. That’s where the wind resources are the strongest, where you don’t have the same siting issues as you have on the East and West coasts. So the Midwest utilities that have a lot of exposure to transmission are really well positioned to benefit for the next 20 years. Companies like Ameren, Exelon, AEP, and Xcel would all be big beneficiaries. And the Midwest tends to have far less of the severe weather that impacts these utilities’ physical plants.
Extreme weather events have also been disrupting supply chains this year. Which industries are coping with that best?
Keith: There’s two issues around the supply chain: the actual supply chain and labor shortages. We’re seeing that companies that are investing in their workforce, building up strong, inclusive workplaces around safety, diversity, health, and wellness, have been much better equipped to not only manage, but thrive. Cboe, which is one of the largest global exchange holding companies, has a level of about 5% voluntary turnover, which is among the lowest of its peers. The programs it’s offering in-house—leadership development programs, employee wellness programs, women’s initiatives, a group of 50-plus diverse associates—are generating a very high level of engagement and minimizing that turnover, which allows them to continue to grow, faster.
Another company that I think is really well positioned is Trumbull. They’re primarily focused on cloud-based software solutions for construction and agricultural transportation. Within the transportation sector, for instance, truck driver shortages are the No. 1 issue for carriers right now. What Trumbull does is remove that friction from drivers’ jobs with dynamic scheduling, optimized routing that incorporates real-time, environmental data, traffic data, to provide a more efficient route, all the way down to that very last mile.
Picks from the experts
Palo Alto Networks (PANW, $530)
HubSpot (HUBS, $822)
Roper Technologies (ROP, $498)
Guidewire Software (GWRE, $123)
Ameren (AEE, $85)
Exelon (EXC, $54)
American Electric Power Company (AEP, $83)
Xcel Energy (XEL, $65)
Cboe Global Markets (CBOE, $129)
PayPal (PYPL, $194)
Square (SQ, $225)
Prices as of 11/19/21. Stocks appear in the order mentioned
On the labor shortage front, we’re in the middle of what people have been calling the Great Resignation, with workers feeling burned out. Leslie, the startup space is a notoriously hard-charging, work-all-hours universe. I’m wondering, are you seeing companies that are addressing this?
Feinzaig: I mean, you certainly hope so after the couple years that we’ve had. I’m seeing a huge number of companies trying to solve the future of work for bigger corporations, everything from mentoring platforms, health services, coaching, development, and trying to sell into the enterprise and create engagement across employees. Are they gonna succeed? I don’t know.
Ten, 15 years ago, everybody wanted to work at a startup that served beer in the lobby. I think these days, people are looking for a company that can think about them as a human being and provide that 360-degree support. We’re seeing a ton of companies doing companywide mental health days. To compete for talent, it’s no longer just about who pays the most money. It’s about, Where can I spend my one, precious life and have some wholeness?
In times of great disruption comes great opportunity. And our behavior still hasn’t settled in to what the new normal will be.Leslie Feinzaig, founder and managing director, Graham & Walker
You could argue that mindset is also reinforced by some of the innovations in consumer-facing companies, taking the friction out of transactions.
Chung: After 20 years of internet and technology and cloud and mobile computing, a lot of people say, “Well, what is the next big opportunity?” Sometimes it’s in industries that have been slow to adapt and change to meet consumers. Finance and financial services is definitely one of these. I mean, it’s still stunning how many physical branches there are for some of our major banks. But we finally did see during COVID massive adoption of all kinds of mobile apps for consumers in the financial sector. Cash App, PayPal, Square, and many others in financial services. And also for businesses, management of their financial processes—bill payment, purchasing and accounting, contract management.
Oddly enough, many of these things are more advanced in terms of digitalization outside the U.S., for example in China, where WeChat Pay and Ant Financial among Chinese companies are far ahead in their adoption compared to the U.S.
Koch: What’s really interesting about this moment, and what COVID has helped accelerate, is that we’ve had a lot of disruption of technology. But most of it happened in the retail space. And so we got these, you know, cardboard boxes that come overnight to our house. And it’s superconvenient. And everybody loves that. Now we’re at the precipice of technology being pointed at these very large sectors that tend to be more regulated. So they were in a lot of ways harder to disrupt.
There is currently $14 trillion of market cap globally in internet companies. And there’s $16 trillion of market cap in financial services companies. So the opportunity, I think, is enormous. In 2021, we’re starting to see some of those companies that were ripe for disruption get very, very hurt. Those old-line payments companies reported very muted earnings, because they’re getting disrupted by some of the companies that Dan was speaking to, whether it’s Toast or Square or Shopify, which are providing very similar service, and in a lot of ways a better service, at a lower cost with end-to-end solutions.
There are other parts of the world that are farther along on this journey. There’s two takeaways for me from that. The first is that you’re going to see the U.S. payment space look more like China. So it’s probably going to coalesce around e-commerce, social media and payments, and apps that can wrap those three things together are positioned to win.
Second, it turns out that you do need to have a lot of local knowledge to be successful in these markets. Take Brazil as an example. They’re starting to build out their very own payment ecosystem. So I would put forward PagSeguro as an example of a company that’s providing payments to micro-merchants. In some ways emerging markets are ahead because they didn’t have the legacy infrastructure. But we’re also realizing that we’re going to have a lot of local winners. It is not necessarily going to be those five Big Tech platforms that own the whole world in this space.
And emerging markets are an arena where a lot of American investors are notoriously underinvested.
Koch: You’re very right. Most U.S. investors are under-allocated to the rest of the world into emerging markets, specifically, which is somewhere between 10% to 15% of global equity market cap, but usually only a couple percent of people’s equity portfolio in the U.S., if they have it at all. And there are some fantastic companies, great growth opportunities.
How is inflation changing your thinking right now?
Giroux: We need to keep in mind that 2021 is really the perfect storm. Just through normal recovery, we were always gonna see above normal inflation this year. But we also had massive stimulus, and people are spending that. Demand for consumer durables is up in many cases more than 20% above the trend line. We really have never seen anything like it in the data before. You know, appliances, exercise equipment, air conditioning, computers, iPads—way above normalized demand. And the supply chain was just not built to support a 20% spike in demand overnight.
This supply-chain, cyclically driven inflation will probably go away going to 2023. But there are some structural things that will probably result in inflation being higher than it was in the five years prior to COVID. The issue comes down to the worker who doesn’t have a college education. Demand for those workers is going up. And they have more options than ever, whether it be Amazon or whether it be gig jobs that offer tremendous flexibility. Demographically that population is really not growing. So essentially, we need to have wages rise fast enough over time to drive people who are not working and incentivize them to work. We’re probably not going to have 4.5% inflation forever, but I think for next three to five years, you could see inflation be moderately higher than we saw pre-pandemic.
How is that shaping investor strategy?
Giroux: One of the asset classes that I think about being really attractive is leveraged loans. It is around 10% of my portfolio today. It was 1% of the portfolio a couple years ago. These are floating-rate loans, so if rates rise, you benefit from that. If rates are stable, you get a 4% return. And if rates drop, which I don’t think they’re going drop dramatically from right here, you’re probably not going to be hurt that much at all. Treasuries are very expensive right now. Investment-grade bonds don’t look that attractive. And so leveraged loans, earning 4% with one-third the volatility of the equity market—for most risk-averse, risk-aware investors, that makes a lot of sense.
I think one assumption all of us share is a confidence that more of the economy is headed toward normal, after COVID—especially consumer experiences happening in person. What kind of opportunities are you seeing in that world?
Chung: I think small-cap equities, in particular, are going to perform quite nicely in the next year to two years, because typically, small-cap companies are more domestic: a lot of restaurants, hotels, consumer retail, and entertainment. Their business often has more fixed costs and more physical labor. But as the economy unwinds and improves, some of what was the most negatively impacted by COVID will become a positive story.
A lot of consumers for decades have been replacing demand for material things and valuing more “experiences”—things like travel or concerts. Live Nation is a company that we like a lot, the largest concert and live events promoter. This is an Amazon-proof, brick-and-mortar business not subject to digitalization. If you want to go see your favorite musician, nothing replaces seeing them live. And people do like being part of an audience, a crowd. But you also have the rise of the millennials. This is the most experiential-based, youthful demographic group we’ve ever had. They are not as focused on, you know, job, home, car, having kids; they’re much more focused on travel, experiences, concerts.
Another emerging, nonmaterial growth trend I’m interested in is the metaverse. We are finding that this generation is really adopting that, just like they adopted mobile first, and then social media first. I don’t think it’s going to replace real-world experiences, but it’s a complement to the lives of many, many of the younger millennials.
Koch: Two things I would add to that: First, 85% of the world’s millennials live in emerging markets. So these trends around live experiences, travel, the great outdoors, we try to own globally. The other point I would make is that social media has enabled millennial and Gen Z consumers—and I was born in 1980, so I’m a geriatric millennial, I’m told by my team—to take pictures of experiences that they’re having and post them to social media and that in a way, it transforms an experience into a thing. So instead of showing off luxury goods, they can take experiences and do the same thing. I also want to emphasize this idea of being in the great outdoors. There’s a lot of ways to access that in small-cap, whether it’s Yeti, whether it’s pool companies, whether it’s owning the RV companies, or boats—because boat ownership is now higher among millennials and younger generations.
Picks from the experts
Toast (TOST, $45)
Shopify (SHOP, $1,691)
PagSeguro Digital (PAGS, $30)
Live Nation (LYV, $113)
Yeti Holdings (YETI, $103)
Advanced Micro Devices (AMD, $155)
Nvidia (NVDA, $330)
Angi (ANGI, $10)
Roblox (RBLX, $135)
Silergy (6415.TW, $5,250)
MKS Instruments (MKSI, $163)
Prices as of 11/19/21
Chung: We’re seeing a rapid adoption by consumer brands hosting events in the metaverse. They are gamifying, creating environments that can be visually experienced, obviously better visually experienced if you use something like an Oculus, a VR headset. A lot of the leaders are going to transfer what they’ve been doing on social media into this more three-dimensional, more experiential environment. Gucci created a one-of-a-kind digital bag—digital, not a real bag. And they managed to sell it for thousands of dollars. Or look at non-fungible tokens, NFTs. Tom Brady, for example, has got an NFT; it’s basically a digital football card, like a trading card of old. Some people have told me that these ideas are crazy. And I say, Well, just remember one day thousands of years ago, somebody showed up at the marketplace. And instead of bringing sheep and pigs to trade for chickens and corn, they brought something called a coin. And probably the other vendors looked at them and said, “I don’t want that piece of metal. Where’s my chicken?”
Certainly, the experience of the adoption of new things in our age is that the time to 50% penetration has rapidly accelerated, consistently over many, many decades. It took 66 years to get 50% of America with a telephone. It took a quarter of that time to get TVs to 50%, and Facebook got adopted by 50% in probably like less than four years. We’re just seeing rapid, rapid adoption, and that is a phenomenon of our times that I think all investors need to be focused on. So when we think of the metaverse, I don’t have any particular investments to recommend, but I can think of some companies to watch like Roblox and Unity. And of course, Facebook itself, now called Meta, is one to watch. But we do think one interesting outcome is going to be the benefit to some traditional companies. So for example, to power the metaverse the amount of computing power needed is going to be amazing. So there are companies like AMD and Nvidia: Their semiconductors, they’re going to be needed to power this stuff.
Keith: One further point on the millennials: They’re approaching their peak earning years. And among their biggest purchases are going to be homes—financing homes, but also investing in their homes, repairing their homes. One beneficiary would be a company like Angi. Angi is the dominant platform provider of online home services and contracting services. It’s a $900 billion market that they operate across. And millennials are really going to be much more inclined to identify contractors online versus historically what we all did, pulling something out of the Yellow Pages or some other route.
Feinzaig: It’s funny: I haven’t spent much time thinking about millennials. I think a lot about the two edges of the population. One is baby boomers, and the caring economy and how to create technologies that can be for that population. But more important is Gen Z. These are, you know, the first digital natives—a completely different attitude to life, question everything you know—and they take a very different approach to, really, everything about how they relate to one another. So I’m not a huge investor in crypto and metaverse, those edge technologies and edge behaviors, but I do think that they are coming. And right now it looks a lot like play money, it looks very speculative—you certainly should not be investing anything that you’re not prepared to lose—but it is worth learning.
I have an investment in a company that is doing something really interesting in that space, called Makara. And what Makara does is create investment baskets: Essentially, they’re ETFs made up of cryptocurrencies that the retail investor can then go in as investments. It’s packaging all of this up in a way that we geriatric millennials and Gen Xers can understand and get behind, and not have to be quite so worried about gas fees, or what’s OpenSea, and why should I buy a GIF of an animal that looks really weird.
Koch: We talk about diversity a lot in this industry—it’s very, very important. We’re proud on our team that half the assets are run by portfolio managers that happen to be women. We talk a lot around gender and race, and we should, but the other thing that is also important is having demographic diversity on your own investing team. When you’re trying to figure out why someone wants to buy a burrito from Chipotle through Roblox in the metaverse, you need young people on the team to help you understand that.
There’s a truism in journalism that if your kids are talking about it, it’s a story you should pay more attention to. I think that’s true for investors as well.
I want to give everyone a chance to answer one last question: Where do you see the greatest risks and the greatest opportunities in the year ahead?
Giroux: The S&P 500 did $164 per share in earnings in 2019; we’re going to do $205, $207 this year. We’re well above trend earnings growth. Valuations are near 25-year highs in large-cap equities on a median basis, and earnings growth is going to slow. Usually that’s not a great combination for the market. If you’re going from an environment where growth is plentiful to a place where growth is more muted, companies that are more consistent growers will probably go back in favor.
Keith: What we see as the “Look out!” biggest risk for earnings in 2022 is the shortage of labor, which makes it much more challenging for companies to innovate and ultimately grow. Nonfarm payrolls have risen by 17 million since the trough of April 2020, but they’re still down 5 million from the pre-pandemic level. So providing a safe, inclusive, great workplace, I think that’s table stakes today for companies to be able to attract and motivate and retain their talent base. And companies that have a really strong corporate purpose, a mission, are going to be a very significant competitive advantage in attracting and engaging their employees.
Chung: The greatest opportunities I continue to see are in innovative growth companies. I think we’re in a period that COVID accentuated and accelerated, and for some companies and industries accelerated their decline. So the opportunities are around focusing on the companies leading those trends.
On the risk side, my greatest concern for the markets is inflation. For a long time, growth in the U.S. has benefited white-collar labor, but not blue-collar laborers. Now we’re seeing blue-collar [workers] gain some of that back. And I think that’s good for our society, but higher wages at the blue-collar jobs that are so necessary for actual real life do tend to translate into higher inflation over time.
And then there’s commodity inflation. Oil is at $83. We haven’t seen $83 since before the Great Financial Crisis, and that was driven by the rise of China. Today we have an interesting phenomenon. And it’s difficult for me because I am an environmentalist. I welcome the transition to renewables and sustainable wind and solar and others. But we could have a difficult period where because of disciplined, reduced capital spending in the oil and gas industries, and the future outlook for renewables, we could see sustained very high oil and natural-gas prices for years. If you want the markets to force the transition to renewables, that could be the best way for it to happen. But there could be a very unpleasant middle period there.
Koch: We are worried about supply-chain constraints lasting well into 2022. And an area that we have a particular focus on would be the chip famine that we’re all facing. Right now, we have a record high 22-week lead time between when a chip is ordered and when it is delivered. That is a very bad, bad lag. And it’s very relevant because a lot of what we’ve talked about today is the need for more technological disruption, innovation. Chips are foundational to all of that technology.
That leads me to my second point, which is, we continue to think a major opportunity in 2022 and beyond lies in building supply-chain resiliency. We like the companies that have already been thoughtful about that. For the moment, we are expecting both China and the U.S. to make massive investments in being able to design but also fab their chips in those home markets. And so we love semiconductor equipment manufacturers. Silergy would be an example of one in Asia, and MKS Instruments would be an example in the U.S.
Right now, we have a record high 22-week lead time between when a chip is ordered and when it is delivered. That is a very bad lag.Katie Koch, cohead of fundamental equity at Goldman Sachs Asset Management
Leslie, any last thoughts on risks and opportunities?
Feinzaig: As a VC, it’s hard for me to think about opportunities and risks in one-year chunks, rather than in decades. But most of the risks I see are the same as the opportunities; it’s two sides of the same coin. One thing I would say is, more and more money is coming into the startup space, because it has never been easier to start a company; it has never been easier to scale a company. A lot of investors are starting to see that the outcomes in venture and the outcomes in early stage are getting bigger, and they’re happening faster, and there’s more of them to be had. So that’s certainly an opportunity.
Now the challenge is that early stage is not a place where you can very efficiently invest large amounts of capital. In fact, if the opposite happens, like the more money thrown at early-stage companies, the less they learn how to build substantial businesses and be efficient with their capital as they grow, and that ends up being bad for the company.
We would also be remiss to not talk about the giant need and opportunity to bring more people to work, and to bring more people into the tide of investing and wealth creation. Before the pandemic, the World Economic Forum had said that it was going to take something like 160 years for women to reach economic gender parity [with men]. And after the pandemic, it’s almost 300 years. So many women are no longer working; they’re not participating; they’re not investing globally. Even in our profession, less than 1% of all assets worldwide are managed by women.
But the flip side of that is—I’m going to end on a positive note—that same increasingly fast cycle of wealth generation, of company creation, of growth creates huge opportunities for people to participate and build wealth in ways that were really kind of inaccessible to masses before. There are really interesting models out there that are bringing more new people, more new thinking, more new capital into the investing economy, and I’m super excited to see what that brings.
That’s a great note to end on. Thank you all so much for your time, your insight, and your expertise.
3 things to get excited about, and 3 to worry about
Get excited about:
They’re far cheaper, on average, than the S&P 500’s giants; many are poised to benefit from a consumer recovery; and their ranks include fast-growing tech innovators.
Companies like Toast, Square, and PayPal are still in the early innings of their battle to shake up financial services.
Startups and public companies are paying more attention to their employees’ well-being—which can pay off for shareholders by reducing turnover.
Supply-chain bottlenecks should ease soon, but labor shortages probably won’t, and that will stoke wage inflation. (On the bright side, it could ease income inequality.)
Record-high wait times for semiconductors could slow down many companies’ efforts to upgrade and innovate.
The transition from fossil fuels to renewables is an economic imperative, but its short-term costs could bite companies and consumers alike.
A version of this article appears in the December 2021/January 2022 issue of Fortune with the headline, “Investor Roundtable: The smart money moves beyond crisis mode.”
Watch clips of the entire annual Investor Roundtable discussion here. Then read more of Fortune‘s 2022 Investor’s Guide.