The key risks for equities this year

David: Overall, we see three general key risks: first, Geopolitical risks, including the on-going Russia-Ukraine war and potential US-China tensions over Taiwan; second, Inflation and policy risks, as monetary policy normalisation by the US Federal Reserve could lead to tightening global liquidity conditions; third, Economic growth risks, with a key concern being the domestic challenges in China, amid Covid resurgences and policy and regulatory headwinds.

Andrew: Inflation and the policy response of the major monetary authorities around the world the key risk factor all investors are grappling with. For thirty tears, the global economy has experienced structural disinflation that drove interest rates at both ends of the curve to unprecedentedly low levels. This has created a dangerous denominator problem as equity investors have become used to elevated valuations. Rising inflation threatens this and also adds the risk of an overly aggressive policy response from central banks. The age of easy money may well be over.

David: An active approach to investing makes a difference in times of unpredictability, enabling investors to sidestep parts of the market that are most exposed to risks and uncertainties. ESG is a key part of this active investment approach, particularly when it comes to assessing regulatory risk. We think a quality-focused investment approach – one that will help provide a buffer against rising volatility – is even more critical in such times and we favour well-run quality companies with pricing power and ability to pass through cost pressures and weather the difficult conditions. We are taking advantage of current volatility to double down on quality. This means that we have made an extra conscious effort to focus on company-specific drivers that could have a better chance of offsetting macro risks and style/factor overlays and generating alpha, or excess returns above the benchmark for our investors. Our analysis has shown that quality, as a style, continued to outperform on a longer term basis.

Andrew: The rigour of our investment approach is one of the key ways in which we prepare for the unpredictable. The focus on the strength of business models and repeatable cash flows from operating assets, combined with a strong valuation discipline ensures that the securities in which we invest can weather storms and provide a degree of protection in difficult and unexpected times.