2023 Investment Views: Quality equities

Position for growth in 2023

As the interest rate environment begins to normalise in 2023, we believe investors should seek exposure to those companies with access to growth opportunities.

23 Nov 2022

3 minutes

Clyde Rossouw
Q&A with Clyde Rossouw

Quality equities

Hear Clyde Rossouw, Co-Head of Quality, discuss the current investment environment.

Q How has Quality performed versus the broader market in 2022?

It is important to stress that there are various expressions of Quality, including defensive businesses such as staples, structural growth stocks such as technology and cyclical companies such as financials. It has clearly been a challenging year for investors, and broadly speaking, Quality has performed in line with the market, largely as a result of the valuation adjustment we have seen, because stocks have all become cheaper across the board. There has been no fundamental problem with the stocks or their earnings; it has been more about what multiple the markets have been prepared to pay for those stocks, which has decreased in the face of rising interest rates.

Q What do you think will be the key drivers of equity markets in 2023?

We expect geopolitical uncertainty to remain with us for some time to come. What is likely to change though, from an investment perspective, is probably the outlook for inflation and ultimately, therefore, earnings growth and whether or not we’ll be in a recession by this time in 2023. Some of the big drivers of inflation – such as oil, copper and iron ore – are already starting to moderate and, as a consequence of that, investors should look to a more interest rate friendly environment in 2023. The importance of this is that we can then get back to focusing on things like company earnings; how fast companies are going to grow at and worry less about whether or not stocks need to de-rate and need to become cheaper.

Q How do you expect Quality to perform in 2023?

We believe the stocks that are probably likely to underperform in 2023 within the broad Quality banner would be the more defensive stocks, such as pharmaceuticals and consumer staples. In contrast, those businesses that are more strongly endowed with growth characteristics – such as technology – are probably going to be higher up on the performance stakes next year. So, within the Quality spectrum, we believe it is important that managers position their portfolios for growth next year, and not treat all Quality stocks as a single item.

Q Should growth outperform value in 2023?

The attraction of value is obvious in a rising rate environment because investors tend to have shorter-term investment outlooks, so they are very happy to try and bank returns for one or two years. However, as soon as things normalise a little bit more, investors can find themselves invested in businesses that have attractive upfront valuations but are more likely to be at the top of the cycle from an earnings perspective – whether that’s energy companies where oil is moderating or refining margins are declining, or whether it’s banks where the interest rate cycle has unequivocally been supportive of their earnings. Instead, investors need to look for businesses that have the next level of growth beyond some of these cyclical characteristics. While there is still some time to run until the rate environment normalises, we believe that the value tailwind is beginning to run out, which will favour those stocks with access to growth.

General risks. 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. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Specific risks. 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.

Clyde Rossouw
Head of Quality
Clyde is Head of Quality at Ninety One, based in Cape Town. He is lead portfolio...

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