Typically, in the early stages of a cyclical recovery when inflation expectations start to rise, we see the market gravitate towards the perceived beneficiaries including commodity producers, banks and many cyclical industrials. It has been no different this time around, with strong outperformance of many of the cyclical and rate sensitive parts of the market since the positive vaccine data started to emerge in early November 2020. In addition, a range of factors including low/negative interest rates and government stimulus, have contributed to pockets of rampant speculative activity which has driven the share prices of many unprofitable growth and thematic stocks to arguably unsustainable levels.
While we haven’t been surprised to see this market rotation take place, we strongly believe that over the long-term share prices will be driven by underlying company fundamentals. As concerns over rising inflation and higher interest rates continue to build, we feel this could be a catalyst for market participants to return their focus to some of the key fundamentals which have arguably been ignored during the early stages of the cyclical recovery.
Looking forward, we believe our ‘quality at a reasonable price’ investment strategy is positioned well to outperform in an inflationary and rising rate environment due to exposure to companies with good pricing power, strong balance sheets and highly visible cash flows, and less exposure to companies with high valuation risk. We also believe maintaining a portfolio with these key attributes has been a key reason why we have been able to outperform during historical periods of rising inflation and interest rates.
Download this short paper that looks more closely at some of the factors driving inflation and what this potentially means for portfolio positioning and global equity performance moving forward.
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