Global growth slowed down by a challenging context
The Russia–Ukraine conflict coupled with economic sanctions, soaring commodity prices and a resurgence of Covid in China have altered our expectations for global economic growth. More importantly, inflation will last longer than previously expected, impacting asset classes differently.
We are lowering our global growth forecast to 3.3%, against 4.0% earlier this year. Europe will be the most heavily affected, while the US and Asia are so far relatively immune to the recent geopolitical tensions.
We also expect a global inflationary shock this year with inflation settling in an 8–9% range in the US and above 7% in Europe with upside risks in place.
With inflation running at a 40-year high, central banks will be obligated to maintain an interest rate hiking cycle (impacting equity valuations) all the while adopting a cautious outlook on growth.
Equities still relevant
During periods of heightened inflation, equities remain an attractive asset class. However, selectivity across sectors should be at the centre of any investment strategy.
At the start of 2022 we opted for a diversified approach (exposure to all sectors) rather than the previous year’s barbell strategy (exposure to growth and cyclicals and avoiding defensives). While we still maintain a positive long-term view on growth companies (software, payments, e-commerce, social media, etc.) which have corrected significantly since the beginning of the year, we see limited short-term catalysts to revive demand.
Geographically, we see the US as the most protected in terms of economic growth, energy independence, and domestic demand. European investors can take refuge in high dividend paying companies, often found in defensive sectors. We still think China is of interest, and recent government statements that the technology sector regulation will soon end is a first step towards restoring market confidence.
Three themes offering resilience
As regards new equity investments, we consider that the three following themes fit the current macroeconomic backdrop:
- Defensive or value: In an environment of elevated market volatility and limited visibility we turn to companies providing essential goods (food, beverages, personal care) and services (telecoms, utilities, healthcare) or those with a recurring revenue profile (software). As rising interest rates are a valuation headwind for growth companies, investors will turn to cheaper alternatives in the value segment (financials, energy) benefiting from the upward trend in interest rates.
- Quality growth & pricing power: Market leaders and companies positioned on the premium end of goods and services benefit from pricing power that allows them to better absorb rising costs (labour, raw materials, freight), and protect margins and earnings growth. We see value in global brands (although the decreasing consumer discretionary spend remains a near-term risk), mission-critical industrials operating in niche segments (elevators, railways, industrial gases, toll roads) and mega-cap technology (leadership status).
- Commodities & energy transition: In addition to the current sector tailwinds of supply shortages and strongly resuming demand, commodities and agriculture are natural beneficiaries of inflation. We see value in mined commodities (copper, aluminium, nickel, zinc and lithium amongst others) as well as agritech players. Demand for base metals and renewable energy actors are being propelled by energy transition initiatives undertaken by governments to reduce dependence on traditional energy sources.
If you want to learn more, please contact our Advisory services team.
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