Feature Story

Looking Ahead: Key Investment Trends to Watch in 2022

January 2022 / 9 min, 30 sec
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For a glimpse of what’s ahead for 2022, Client Focus asked four lead William Blair analysts to share their insights on the biggest factors likely to impact their sectors in 2022. While analysts are optimistic about the outlook, the Omicron variant is yet another reminder that COVID-19 has and continues to impact businesses.

In year-end interviews, Jonathan Ho discussed cybersecurity, Brian Drab digital supply chain, Tara Patock ESG investments, and Larry De Maria food security amid climate change. Here’s what they said:

Jonathan Ho
Jonathan Ho, Equity Research analyst, Cybersecurity

Cybersecurity Spending Shows No Signs of Slowing

Cybersecurity spending by businesses, the government, and individuals was robust last year. That trend will likely continue not only into 2022, but also in the years ahead as the threat of cyberattacks has intensified since COVID-19.

As society grows more dependent post-COVID on the digital world to perform all kinds of tasks—working from home, doctor visits, shopping, viewing new movies, connecting with family and friends, and so on—the attack surface for cyberhackers dramatically expands.

So, while there are great benefits of being online, there is a cost. That’s what cybersecurity is trying to defend.

Cyberattacks on Colonial Pipeline, SolarWinds, and the Microsoft Exchange over the past 12 months are reminders of the increasing risks. A 2020 report from security software company McAfee estimated global losses for cybercrime topped $1 trillion in 2020 and could climb to over $6 trillion in 2021.

The No. 1 attack method used by hackers today is ransomware—malicious software used to infect a digital device. It allows cybercriminals to take it over, block access to the system, or threaten to publish personal or company data until a ransom is paid.

In the case of Colonial Pipeline, which supplies 40% of the fuel consumed on the U.S. East Coast, hackers stole a single password. They breeched the company’s virtual private network (VPN) system, which did not have multifactor authentication in place. The hackers then attacked Colonial’s billing system. Even though they did not reach the actual pipeline, potential damages could have been in the billions of dollars. Ultimately, Colonial paid a hacking ransom of several million dollars.

Since the latest round of large-scale breaches, there has been increased demand by companies and organizations to modernize their security systems. Fortinet, Palo Alto Networks, and Okta are among the leading companies developing solutions, including cloud-based next-generation networks, virtual firewalls, and zero trust network access (ZTNA)—essentially a VPN replacement.

The second big wave of cyber exposure is coming from the expanded use of technology by businesses to interact with customers digitally. As businesses compete to attract the attention of consumers with new apps, catchy online ads and promotions, it requires developers to build applications quickly, without making security a priority.

That is driving investment in systems known as DevSecOps, which integrate security with the latest business online software. The ultimate goal is reducing exposure to hackers without compromising the agility or speed of the online experience.

The reality is there is no way to completely prevent cyberattacks. Cybersecurity is probably one of the most important things that needs to be done properly. So between now and the future, there will be more technologies developed to aid society. It’s a growth area that shows no signs of slowing.

Brian Drab
Brian Drab, CFA, Equity Research analyst, Industrial Technology

The “Shortage of Everything” Spurs Digital Transformation of Manufacturing Sector

The digital manufacturing industry gained momentum in 2021, a trend seen continuing into 2022 and beyond as companies worldwide explore digital technologies such as additive manufacturing, simulations, and analytics to make products, automate processes, and rethink the supply-chain architecture.

While many manufacturers were pursuing digital or smart technologies before the pandemic to increase efficiencies, the pandemic accelerated their interest.

The pandemic brought to light the fragility of existing supply chains. Lead times for some products have ballooned from weeks to over a year. Companies have been stuck with too much inventory in the wrong place, separated from its destination by increased export and import restrictions, exorbitant shipping costs, and limited transportation availability. Labor shortages have exacerbated the issue, with some workers unable or unwilling to come to work for a variety of pandemic-related issues.

Digital technology can streamline the process, beginning with the design work and directing workflows in factories to managing inventory and shipping products. And, leaders at manufacturing plants are prioritizing supply-chain technology investment over other initiatives, such as reshoring. They see it as one of the most critical factors in the recovery of U.S. manufacturing.

Digital manufacturing software, for instance, creates virtual representations of factory floor layouts and simulates production processes, allowing companies to discover potential bottlenecks and waste before a factory is built.

Robotics and automation are contributing to increased productivity on factory floors, including assembly, transportation of supplies, packing, and shipping. Digital representation of parts—converting information into a computer-readable format—allows for a variety of smart processes like 3D printing and injection molding.

By combining cloud infrastructure and smart technologies, “proximity” manufacturing is a reality where companies can make parts on demand wherever and whenever they are needed, without building inventory or worrying about shipping delays.

Customers are embracing the changes, leaning on smart manufacturers for supplies when their traditional supply chains are challenged. Take rapid manufacturer Protolabs. It shipped $18 million of personal protective equipment (millions of face shields, test kits, ventilator components) in 2020. And Protolabs was making many of these parts for the first time, showcasing the industry’s agility.

Research firm MarketsandMarkets expects the smart manufacturing industry to grow at a 12% compound annual rate from 2020 to 2025. Accounting firm BDO said of its 2021 survey of CFOs with manufacturing firms, investment in technology and infrastructure is the top priority.

Going forward, advanced digitization will play a major role in the rework and consolidation of global supply chains. Protolabs, Fictiv, Xometry, and other innovative companies providing smart solutions to the manufacturing industry stand to benefit from this increased investment.

Tara Patock
Tara Patock, CFA, Investment Management portfolio specialist, U.S. Growth & Core Team

Climate Transition Takes Center Stage Among ESG Investors

Interest in investments that consider environmental, social, and governance (ESG) criteria has been growing for years but has accelerated among asset owners in the U.S. and abroad. A significant driver of the recent acceleration is increased awareness that urgent action is needed to address the threat climate change poses to the environment and world economies.

This has compelled global policymakers, corporations, and individuals to act.

Among the actions taken in 2021 was the formation of the Glasgow Financial Alliance for Net Zero, a global consortium of financial institutions pledging to deliver over $100 trillion in financing to transition global economies to net zero carbon emissions by 2050.

In addition, net zero commitments are becoming increasingly prevalent among corporations, investment managers, and asset owners. For example, multinational companies Microsoft and Amazon have committed to reach net zero emissions by 2030 and 2040, respectively. President Biden has also put a focus on climate change through numerous actions, including rejoining the Paris Agreement and his proposed Build Back Better plan.

The convergence of these and other similar initiatives creates a powerful catalyst for change and demand for ESG-oriented investments, especially those aligned to meet net zero commitments and other environmental goals.

As a result, institutional investors and asset managers are increasingly focused on identifying companies that provide sustainable solutions to environmental challenges. Those companies appear to be well positioned for long-term, open-ended growth.

A perhaps less obvious opportunity for investors is in traditionally “dirtier” areas of the market, such as high-carbon-emitting industries, where some companies have made credible commitments to significantly reduce emissions over time. Additional opportunities lie with companies offering services or products that help others mitigate their environmental impact or achieve other positive sustainability-related outcomes.

Measuring such outcomes remains difficult, yet the demand for ESG data is well ahead of the availability of accurate and comparable data. While large companies report a wealth of information, reporting methodologies vary, making it difficult for investors to compare data across companies.

Smaller companies, on the other hand, generally have fewer resources dedicated to ESG reporting. Gaps in reported data create the need for ESG data vendors to make estimations using unique estimation methodologies. Compounding the situation is the growing demand from investors and regulators for asset managers to provide ESG reporting.

One of the key trends to watch in this space for 2022 and beyond is improving quality of ESG data. Evolving reporting requirements for public companies and industry collaboration could improve the consistency with which data is reported.

Today, data challenges also provide opportunity for investors and asset owners willing to dive into the details. With time and effort, active investors who are able to accurately assess opaque information and use it to improve investment decisions may stand to enhance returns as well.

Larry De Maria
Larry De Maria, CFA, Equity Research analyst and co-group head, Global Industrial Infrastructure

Big Themes in Agriculture for 2022 Are Climate Change, ESG, and Food Security

In the world of agriculture, climate change, ESG initiatives, and food security are all big themes driving innovation and investments.

There are many opportunities for farmers to adopt technology to reduce the environmental intensity of farming while increasing productivity. Among the innovations underway is high-tech, cloud-connected equipment that allows farmers to plant fewer seeds, apply less herbicides, and better manage fertilizer applications—while getting better yields. This is all happening now and will accelerate over the next five to 10 years amid the advancement of in-field variable-rate technologies to grow crops.

Equipment manufacturers such as Deere, for example, are starting with see-and-spray technology for more-efficient spraying. The system differentiates between weeds and plants in the field, applying herbicides directly on the weed, dramatically reducing waste. AGCO, another big ag equipment company, is expanding its line of precision planting tools, offering field monitors, seed delivery systems, nitrogen delivery systems, and more that help farmers produce more with less. Agricultural equipment manufacturer CNH Industrial bought Raven Technologies to improve its precision ag innovation capabilities.

A relatively new private company, 360 Yield Center, is developing several farming solutions focused on reducing production costs. Its latest product, 360 Rain, is an autonomous irrigation system that uses less water, covers more of a field, and delivers water to the roots more efficiently than traditional irrigation systems. With 40% of water usage in North America going to crop irrigation, these types of innovations can help growers manage a crucial resource.

Given our resource-scarce world, very efficient farming practices focused on preservation are growing in adoption because the economics are becoming so compelling. In fact, many in-field adjustments that farmers traditionally made are now being automated to ensure the best agronomic decisions are made in real time.

Another area gaining attention in the sector is carbon trading markets. Given the increasing number of companies like Microsoft and Amazon pledging to reach “net zero” carbon emissions within 10 to 20 years—CO2 produced balances the amount removed from the atmosphere—they are going to need to buy carbon credits to offset their carbon footprint. By embracing carbon farming practices, such as planting cover crops and reducing soil tillage, farmers can capture carbon. Bridging the transition to carbon capturing and reselling credits are companies like privately held Indigo in Boston and seed/chemical maker Bayer. 

Overall, the ag sector performed exceptionally well last year. But challenges in Q4 related to supply-chain disruptions will likely remain an overhang on the sector into 2022, similar to other industries. But the billions of dollars allocated in the infrastructure bill to upgrade inland waterways and ports and to improve rural broadband will be a huge help in transporting and shipping grain overseas and in giving farmers access to cutting-edge technology. These investments are long overdue and will be a boost for agriculture going forward.