How much will the consumer accept?

Q What is your outlook for 2022?

There are certainly lots of different variables to consider. Part of what makes this job so interesting is putting the ever-evolving mosaic together, forming a view and picking the appropriate risk. Our strategy takes very long-term perspectives for our investments, so we try not to be too swayed by the idiosyncratic macro dynamics of any individual year. Instead, we try to assess the long-term sustainable economic advantages of businesses and truly invest in those best-in-class companies that can adapt to the circumstances as they change. 

Q What are the biggest risks entering 2022?

My primary macro level concern is the sustainability of demand. Right now, we are seeing supply-side driven cost inflation, which has come through across the recent earnings season, and it has taken a lot of the bandwidth of management teams to manage their supply chains. Companies now are attempting to pass this on to consumers and whether the consumers are prepared to absorb higher prices has implications for corporate growth and margins.

Risks are skewed to the downside, frankly. 2022 growth is going to face some very challenging comparables and consumers’ budgets will be increasingly stretched, with energy prices rising, corporates passing on these price increases and corporate margins currently sitting at all-time highs. On the monetary front, policy tightening has begun, so there are a number of risks that have arisen, some of which are priced in and others less so as investors are still waiting to see how they play out. Top-of-mind is how well consumers can absorb these price increases that are coming at them from all angles.

Q What are the opportunities you see in 2022?

The headlines are obviously about the yield curve pricing in rate rises in the United States as the Federal Reserve embarks on a tightening cycle in the second half of 2022. However, real rates are still negative so for me, the opportunity remains broadly in equities, and I would say specifically those that are low risk and have resilient structural growth opportunities and generate enough free cash flow that they can both self-propel into those growth opportunities and also return cash to shareholders.

Q How is International Franchise currently positioned?

As always, we like to focus on companies with strong, intangible assets, low capital intensity and consolidated market structures. Most of the opportunities that meet our criteria are in the software, healthcare, staples and consumer discretionary sectors and we allocate our capital primarily in these areas. We diversify our risks somewhat across long and short duration growth opportunities and along the valuation spectrum so that we can absorb some variation in macro environment but, broadly, we are investing behind those businesses that can be successful through a variety of different macro environments, positive or negative.