As we move deeper into 2023, consensus suggests that the global economy is slowing. The IMF flagged as recently as April that developed economies are likely to see an “especially pronounced growth slowdown”, more than halving to 1.3% this year. Inflation is proving to be a significant culprit, remaining far more persistent and elevated than initially anticipated.
As a result, there has been little let up to the hawkish rhetoric from central banks as they continue lifting interest rates, with the Federal Reserve announcing a 10th straight increase in May. This has had consequences – as we have seen in the US banking sector – and we expect markets to remain choppy in the short term.
As the economic outlook comes under increasing pressure, earnings growth will become squeezed, and we believe it is the resilient earnings demonstrated by high quality, global businesses that are going to become increasingly important for investors. Revenues tend to be repeatable because these companies typically offer products and services that people need: ranging from medical device makers to software providers through to staple food producers.
These defensive characteristics have enabled quality companies to survive multiple economic cycles with their market position and competitive economics intact, while delivering returns to shareholders that have typically been not only stronger than the market, but also relatively defensive and uncorrelated.