Global equity investors can look past the negative combination of slowing growth and rising inflation to underlying trends that are likely to persist for many years – and, therefore, which offer promising return potential.
Schroders believes that whether the ultimate outcome of today’s bleak outlook is recession or stagflation, when real economic growth is absent whilst prices continue rising, the implications for corporate earnings are negative.
This demands a selective approach to find opportunities. “In this environment our focus is on pricing power,” said Alex Tedder, head and chief investment officer of global and US equities at Schroders.
“Looking further out, long-term drivers of growth, such as climate change, are being over-looked. There are many opportunities for those with patience,” he added.
Patience needed
Given that investors are bombarded with news about rapid market changes, dominated by negative sentiment and high volatility, it is inevitable to see an emphasis on the short term.
However, Tedder warns against judging climate-related companies by their performance in recent months when they have mainly fared relatively poorly as investors have focused on the price of oil, coal and other energy commodities.
Digitalisation is another reality that is accelerating behind the scenes, he added, yet technology has been one of the weakest areas in the last 12 months.
At the same time, advances in biotechnology continue apace, but again Tedder believes the space has been marked down heavily in a post-pandemic world.
“In each case, opportunities are opening up for investors with the ability and patience to look through current market turbulence. We think that the long-term pay-off for investment in these areas of structural growth will be immense,” he said.
Investing in uncertainty
Equities investors can also find specific opportunities in key sectors. For example, exposure to energy and mining stocks has benefited from the strength of commodity prices, which have given a significant uplift to the earnings and cashflows of these companies.
Yet it shouldn’t be assumed that companies can simply raise prices in an environment of rampant inflation and rising interest rates. As a result, earnings disappointment might follow. And although markets have fallen substantially, the negative trend in earnings means they may not be as cheap as they look.
As a result, Schroders is focused on pricing power – the ability to pass through cost increases without compromising demand.
“There are industries where pricing power is generally quite strong,” said Tedder. “Healthcare, for example, is an area driven by innovation, where many companies have one or several unique products that give them the ability to sustain pricing and grow earnings.”
Further, technology, and particularly in software but increasingly also in leading-edge semiconductor manufacturing, is another area where individual franchises are ring-fenced and sought after. “[This will] allow these companies to prosper in difficult times,” he added.
