Chris Hogbin:
The first half of the year has been an unsettling time for equity investors. With a set of macroeconomic factors, for example, the accelerating inflation, the central bank responses to that situation, as well as the ongoing geopolitical situation with the Ukraine war now in its fifth month.
While these factors are undoubtedly global in nature, investor focus has primarily been on the US, where the federal reserve bank has taken both quicker and sharper action to start to curb inflation.
Clearly, there’s a big question around, is there going to be a recession? For sure, we’re going to see a slowdown in economic activity over the coming quarters. Whether that tips us into a recession or we just skirt it remains to be seen.
But what we’ve seen in the equity market so far is really a contraction in valuation multiples rather than a reduction in the earnings estimates. However, as we move through the next several quarters, we would expect to see earnings estimates come under some pressure.
First and foremost we need to be aware that while we should have a view on the macroeconomic environment, our ability to accurately predict it remains relatively low. So it’s about finding stocks that we believe can perform robustly through different macroeconomic environments. Specifically for us that means trying to find quality companies
While quality hasn’t worked particularly well so far this year as a factor, we do believe that going forward companies that exhibit strong quality should be able to prosper through the uncertain economic environment. Companies that have got strong cash flow, companies that got strong balance sheets, but fundamentally it’s about companies that have got a strong competitive advantage, that can have a moat around them so that they can consistently maintain their margins and still grow even when other competitors are finding that challenging.
Ultimately it’s about understanding the individual companies that you’re investing in, trying to understand the resilience of those companies across different macroeconomic outcomes and ultimately staying the course.
Investors understandably may feel unsettled by the equity performance and the volatility that we’ve seen in the first half of the year.
However, as we look forward, there are three things that I believe investors should consider. Firstly, low-volatility strategies that might offer more of a cushion in more challenging markets. Secondly, to more broadly consider different style exposures, specifically value that tends to perform reasonably well during high-inflationary periods. And thirdly, international allocations, with certain markets—for example, China—at very different points in the macroeconomic cycle presenting potentially very attractive opportunities.
