![]() ![]() The prospects of higher US interest rates and the subsequent knock ‑ on impact of funding costs for emerging markets have seen the asset class underperform materially versus developed markets. We remain underweight commodities, while maintaining an energy underweight.Įlsewhere, our faith in our ability to find good stock ideas in emerging markets remains steadfast. Within materials, we are diversified across metals, chemicals, and packaging. The investor reaction has been clear – a significant repositioning into areas of the market that might benefit from monetary tighteningĪs commodity supply/demand dynamics have tightened, we have reduced our underweight – primarily via diversified exposure within materials – to help the portfolio in an environment of higher inflation and to ensure we are maintaining appropriate portfolio balance. We are also seeking to capitalise on market capitulation, where we believe ‘baby out with the bathwater’ scenarios can create attractive entry points for truly special, long ‑ term growth businesses. We are retaining those truly advantaged, disruptive businesses we believe can deliver outsized market share gains and accelerating economic returns over the medium term. The outlook for some of our higher ‑ valuation companies has deteriorated – including some of our tech and internet retail companies suffering from recession fears, cost inflation, and challenges obtaining inventory. Our focus remains on asymmetric, idiosyncratic, bottom ‑ up stock picking – primarily in durable growth compounders. The setup for markets changed dramatically in the first half of 2022 and we responded by creating stronger portfolio balance across sectors and re ‑ underwriting each position. In an environment of rapidly changing and powerful economic/geopolitical factors, we acknowledge heightened uncertainty and believe it is a period requiring pragmatism, not overconfidence. While extended valuations and shifting inflation have played a part in the recent correction, it is also crucial to note the outperformance of growth stocks has been built on a prolonged and persistent fundamental advantage – superior sales, earnings, and cash flow growth.Ī marked uptick in inflation and rising interest rates have contributed to equity market weakness and a very distinct change in investor sentimentĪgainst a backdrop of lower val uations and the likelihood inflation will peak as demand destruction takes hold, we believe stocks delivering superior earnings over the next few years will be prized by investors. Since the global financial crisis, outperformance of growth stocks has been the dominant feature of equity markets, one accelerated by the coronavirus pandemic. The moves have resulted in a magnitude of underperformance for growth stocks that we did not anticipate, especially in such a short period. T he sheer size and speed of the market’s rotation has been exceptional. While the sources of rising inflation are embedded in a complex mosaic of temporary and structural forces, the investor reaction has been clear – a significant repositioning into areas of the market that might benefit from monetary tightening. Our faith in our ability to find good stock ideas in emerging markets remains steadfast The emergence of inflation catalysts against a backdrop of supply chain constraints and tight labour markets is to be expected, but war has meant inflation has accelerated faster than expected and is presenting a significant challenge for monetary policymakers. We are using our experience separating the long ‑ term prospects of stocks from the short ‑ term narratives.Īt a headline level, we believe 2022 marks a point of regime change for investors.Ī marked uptick in inflation and rising interest rates have contributed to equity market weakness and a very distinct change in investor sentiment. ![]() While the geopolitical and economic backdrop is dominating market movements, we have managed through periods of uncertainty before. Stocks remain especially volatile given the shocking events occurring in Ukraine, adding uncertainty to an already complex backdrop of rising inflation and monetary tightening. Markets have endured a tumultuous period over the last two years – with a pandemic, economic recovery, and now, military conflict in Europe.
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