- We are managing the fading of two of the largest drivers of markets in recent years: COVID-19 and liquidity provided by central banks.
- These trends are likely to drive a change in behaviour from both consumers and markets. This represents an opportunity to position for the future.
- We are investing in areas that are likely to benefit from rising rates, the reopening of economies, and countries where we believe a new economic cycle is just beginning, particularly in emerging markets.
The last few years have been particularly challenging for investing, with the Russia‑Ukraine conflict the latest event for investors to negotiate. Aside from the very concerning humanitarian issues, the conflict also has ramifications for future energy policy and near‑term inflation as energy prices spike. We are also managing the fading of two of the largest drivers of markets in recent years: the coronavirus pandemic and the liquidity provided by central banks to support economic growth. We anticipate these trends will drive a change in behaviour from both consumers and markets. This represents an opportunity to position for the future and put our clients on the right side of the changes we believe will occur. This includes investing in areas that are likely to benefit from a rising rate environment, the reopening of economies, and countries where we believe a new economic cycle is just beginning, particularly in emerging markets.
Two Huge Distortions From the Pandemic Are Starting to Fade
Two major distortions came from the pandemic: (1) the extreme liquidity provided by the U.S. Federal Reserve and other central banks (negative interest rates and quantitative easing) and (2) the extreme behaviour that people went through during the pandemic—whether that was working from home or the breakdown of supply chains, shortages, or a change in behaviour. Those two distortions are likely to reverse in 2022 and 2023 as we are asked to live with COVID‑19 and central banks tighten monetary policy to tackle higher inflation.
The market chased these two distortions to extremes. Bubbles are the mis‑ or over‑ allocation of capital to specific sectors, and we believe that this happened during the pandemic. The market became crowded and price momentum driven. COVID‑winners, U.S. stocks, and large‑cap stocks were the largest beneficiaries. As these two great distortions fade and reverse to some extent, new and different opportunities will present themselves, driven by fundamentals that the market may not expect and is not priced for.
Focusing on the Future—Where We See Improving Economic Returns
We fully expect markets to continue to react in the short term to the current crisis in Ukraine, along with individual data points (inflation, wages, and unemployment). But we need to position our portfolio for where we believe the world is heading.
We don't believe that this is a growth versus value debate. Instead, we are focused on companies where we believe there will be improving economic returns over the next few years—whether that be in financials as the Fed removes liquidity and interest rates begin to rise, or in reopening sectors, such as airlines, travel, hotels, and services that have been so badly impacted by the pandemic. For many of these companies, the return to normality gives us an insight of improving economic returns due to a return in demand. We also have the added benefit that many of these companies have used the pandemic to create efficiencies by investing in technology and improving their cost structures. The risk and the opportunity are that markets are not focused on those ideas. The market remains focused on the past.
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