Nov 23, 2021
Hear from Co-Head of Quality Clyde Rossouw on the types of companies he seeks to own in this unique market environment.
2021 has actually been a reasonable year for equities and I think what it probably reflects, if there is one single most important driver, the continued support of liquidity both from the US Federal Reserve and the European Central Bank. I think their actions have definitely smoothed over some of the cracks which have appeared in terms of the economic landscape.
I think it is important to reflect the fact that we are living in a world which has got inconsistent COVID responses, with different actions taken by different countries around the world. I think some of those COVID responses have morphed into political responses, which is causing some increased nationalism across the board and I think that is also introducing significant distortions, particularly in the goods markets. I certainly think that that bifurcation and some of those crosscurrents are incredibly important. We are not worried about 2022 but we recognise that in this environment there are definitely winners and losers and it is not a normal cycle by any stretch of the imagination.
I think the biggest risk for equities is going to be a disorderly withdrawal of liquidity from equity markets. Liquidity support has definitely driven equity prices to the elevated levels where they are at and we also know that bond yields are probably naturally low. So, US 10-year rates sitting at well below 2%, in an environment where inflation is printing at 5%, is an inconsistency. Most people wouldn’t think that negative real interest rates is a central scenario and yet that is what we have been living with for more than 12 months now. I think the resolution of where inflation will settle at is critical to understanding the outlook for 2022.
I think it is very important that investors are mindful of some of the interest rate risks. I think it is also important for investors who own technological stocks to own the technology stocks with pricing power. It is not particularly helpful to own deflationary hardware businesses or businesses that are struggling to push price increases on. Some of the tech businesses we own have clear pricing power, such as Microsoft, which recently announced it is raising prices for its Office suite.
Pricing power in technology is important because that will offset an investor’s interest rate risk. Thinking about consumer companies, inflation at the till is definitely higher and some of the food producers are benefiting from that. So, we would think that consumer companies provide investors with both defence in the event that there is a setback, and also some inflation proofing within their portfolio, which is absolutely critical heading into 2022.
Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.