It’s been a tough week for financial markets as central banks around the globe continued to raise interest rates in the face of persistently high inflation. It wasn’t the increase, per se, which dented sentiment, it was more the signalling that investors should expect moves of a similar size in the meetings to come.
Given all the negativity and likelihood that conditions (at least on the ground) will worsen in the coming months, how are we positioning portfolios? We believe that it is more important than ever to continue to focus the core of our equity exposure on high-quality businesses capable of getting through this storm and potentially emerging stronger as weaker rivals come under pressure.
Yes, these businesses could continue to be marked lower in the short term. This is understandable – consumers are less confident, the cost of capital is higher and therefore, emotionally investors are less inclined to buy. We believe that the long-term performances of global businesses like Unilever, Diageo, Microsoft and Alphabet will not be determined by this current interest rate tightening cycle and the structural growth drivers behind their investment cases will not be affected.
Unfortunately, we can offer no bold prediction of when the market will turn, and I would be sceptical of anyone who claims they can do so consistently. History, however, suggests that staying the course during tough times, rather than selling once markets have fallen, has proven right in the long term. Looking at the S&P 500 over the past 20 years, the ten best days have occurred not when everyone felt rosy about the future, but after the most volatile periods during the financial crisis in 2008 or the early stages of the pandemic.
For investors capitulating at the points of most despair, it can feel good for the day. The pain is essentially over but that relief is likely to be short-lived and at the detriment of their long-term financial health.
John Naylor, Chartered FCSI – Head of Investment Committee