We face big challenges – Brexit, Covid, surging inflation, the cost of living crisis, the energy price explosion, talk of recession, Chinese sabre rattling, and Ukraine.
Any investor who doesn’t move with the times (while still keeping the medium to long-term in mind) will probably not do as well as those who do adapt to the conditions in which we find ourselves.
The question for investors is this – fundamental change or time to concentrate on the fundamentals?
Will Low, a portfolio manager on the Nikko Asset Management Global Equity team, said: “Investing in risk assets over the last six months has been a miserable affair for everyone involved – particularly in some corners of the market where we have seen an utter collapse in share prices.
“The road ahead is not going to be easy. We are constantly being asked to differentiate between volatility that is just short term in nature, and a signal of change. But we believe there are plenty of reasons to be optimistic about the prospects for compounding your future capital from today’s levels.
“Self-funding growth (high free cashflow) and balance sheets with appropriate and long-duration debt, in our view, will be better placed to keep investing through the pending down cycle. Cash-burning, profitless business models likely won’t pass the test. The penalty for investing at inflated prices is onerous. When the music stops, falls of 80-90 per cent are common for the frothy crowd, and more often than not they stay down as profitability remains a dream rather than reality.”
Andrew Slimmon, head of the applied equity advisors team, Morgan Stanley Investment Management, stated: “The clash between tightening financial conditions and good news from corporate America’s earnings results could characterise most of the year. Investors shouldn’t let the bears scare them out of taking advantage of selloffs, but they also shouldn’t chase gains when there’s a lot of market strength. In the end, 2022 could be an OK year overall, just not as strong as what we’ve seen in the last few years.”
Tony DeSpirito, BlackRock Fundamental Active Equity Investment Team, commented: “While caution is warranted, we believe the equity risk premium (ERP) continues to make a case for equities.
“Stock valuations have come down, but company earnings remain solid.
“While it is important to maintain a long-term lens, particularly when investing for long-term goals, it is also prudent to protect and position portfolios for the prevailing environment. Today’s uncertainty argues for a focus on stability and resilience.
“We are not placing odds on any particular outcome but are generally positioning more defensively. The optimal portfolio to combat inflation is very different from the optimal portfolio for a recession. We advocate using a barbell strategy. This includes owning energy and financials as inflation fighters, and healthcare for a dose of resilience.
“Notably, our analysis of sector dynamics during the Great Inflation period of the 1970s found energy, financials and healthcare to be the top performers. While the backdrop is different today, we do believe these three sectors could outpace the broader market once again.
“Uncertainty is high and daily volatility can test investors’ fortitude. We believe these are the moments when active, fundamental-based stock selection and thoughtful portfolio construction can provide a measure of solace and have a profound impact in the pursuit of long-term financial goals.”
Knee jerk reactions are rarely the right approach, but equally sitting on your hands, hoping things will go back to the way they were, almost certainly isn’t either.
Growth in the broader economy will be more problematic but this is no reason to throw baby out with the bath water.