A look at the latest equity investment trends in 2022

David: Over the short term, there are some sectors and markets that would be better buffered and work as inflation hedges in this environment. Some examples include the commodity and energy sectors as well as markets with significant exposure to energy and materials amid rising commodity prices. Consumer staples could be considered more as a defensive play, being less sensitive to economic cycles and more resistant to market downturns. While rising rates drive net interest margins, especially for banks in developed markets, they could also put a dampener on loan growth. Being bottom-up investors however, we put fundamentals first, with stagflation looming. Steady cash flows and strong balance sheets are key. Stocks with high dividends and steady cash flow generation would typically be more resilient during periods of high inflation and slowing economic growth. Companies with stronger pricing power, such as those that we own, should perform better as they will likely be able to pass through rising raw material costs to consumers and protect margins. This also reinforces the importance of innovation, a premiumisation strategy, brand equity and channel control.

Andrew: One of the more interesting developments is the growing awareness of the influence of the major structural forces reshaping our world on investment decisions. Many of these are systemic issues, such as climate change and rapidly evolving social norms, and these can provide better and more enduring insights than traditional top-down approaches that focus on classical macroeconomic forces.  The complexity of climate change, for example, is manifesting itself not only in opportunities in the energy transition, but also in increased concerns about water and food security. We are increasingly find that a thematic provides an effective lens to identifying emerging growth opportunities.

David: We manage our portfolios with a strong focus on quality. This year we have taken the opportunity that volatility has presented to refocus attention on stocks that we think have the potential to be long-term structural winners, particularly where share prices have been more volatile than fundamentals would suggest. We’ve increased positions where opportunity has allowed us. For example, with the Asian Sustainable Development Equity strategy, we have reduced our exposure overall to longer-dated growth companies. Geographically we have reduced a little our exposure to China, notably by reducing some of the longer-dated growth stocks mentioned above, but have been adding to India, including initiating a position in a medical diagnostics company and a life insurance company.

Andrew: The war in the Ukraine accelerated existing economic challenges, particularly on rising inflation. Supply chain concerns have become a more frequent concern over the last decade and have been again revealed by the conflict. With rapidly rising input costs we have been putting increased focus on pricing power and resilient income streams, as well as the valuation placed on securities; we have avoided speculative, high value companies with little or no revenue. While the market has focused on direct plays on rising commodity prices, we are looking for those companies that will provide the efficiency gains to offset these challenges.

David: We see opportunity in all of these themes – Asia represents an attractive opportunity to invest in companies exposed to secular growth divers such as decarbonisation, but which are also having a positive impact on the region as well. Decarbonisation in particular is presenting lots of interesting opportunities, and as active managers we’ve spent a lot of time understanding and assessing the value chain and associated technology.

We have invested in renewables component manufacturers, solar farm operators, transmission companies essential for evacuating renewable electricity, grid upgrading companies, and energy storage system (ESS) companies that are helping to store renewable energy generated in the day. We’ve also invested in an electric vehicle manufacturer, and the EV value chain. There’s a really broad array of opportunities available to investors in with region, with many of the companies we own global leaders.

Andrew: We are at a critical juncture for decarbonisation: The conflict in Ukraine is likely to force a reassessment of energy policy by governments around the world. The rational response is to increase their investment in renewables to reduce their reliance on volatile oil and gas prices, as well as to potentially unstable regimes. However, there is a risk that fossil fuel extraction rises in the short term in the misguided belief that it will provide better energy security. We belief that this risks increasing the amount of stranded assets and chasing the short term trend in energy prices is risky. The provision of energy solutions is a major structural trend and the valuation of the securities delivering these solutions has now become more attractively priced.