2022 brought us a more volatile start to the year than we would have liked as the US Federal Reserve’s rhetoric indicated that they would not be deterred in raising interest rates, despite the ongoing Omicron variant threat.
The proportion of the global population that has some degree of immunity to COVID-19 has risen impressively quickly, though many in less developed parts of the world are yet to receive a vaccination. The potentially most important point is that the link between infections and hospitalisations has weakened and this could be key to us seeing the beginning of an end to the pandemic.
Inflation remains a concern for many and energy prices have remained uncomfortably high. There are, however, signs that raw material prices are moderating and many of the supply bottlenecks that caused much of the price increases, are now easing. Wage growth remains in question as there is a shortage of workers in many regions, and this could push up remuneration.
Economically, it is clear that the most significant proportion of the recovery is now behind us but we are not yet fully recovered. We believe that economic activity over the next few quarters will remain strong as the disruption caused by Covid should be much more muted, even as the new variant continues to spread.
With volatility likely to remain high in most asset classes throughout 2022 despite this recovery, it is important that we stick to our investment philosophy of selecting high quality assets that will see us through short-term volatility and into longer-term gains. Key reasons for this are:
- Rising interest rates, which mean we need to hold those companies with low or no debt
- If inflation continues to grow, we will need to hold companies with strong pricing power so that they are resilient to the effects of inflation on consumers
- If overall economic growth slows we will need to be invested in companies with higher earnings growth than the market as these should perform better in this environment
- Thematically, we will do best from clean energy infrastructure and infrastructure as a whole (as trillions is being poured into these sectors), healthcare (as this market is growing hugely) and Asian stocks (as these have the highest growth rates)
We continue to believe that this strategy remains appropriate, however in the last few weeks we have seen that our portfolios have experienced relative underperformance, due to a rally in poorer quality stocks that are related to the re-opening of the world’s economies. It may be tempting to diversify here, but these stocks are likely to fall back as quickly and experience tells us that a longer-term high quality strategy should prevail. That is not to say that this rally is over, but that we are focused on a longer-term time horizon.