1. Monetary Policy
Shifting monetary policies are creating short-term volatility between value and quality growth.
We believe that we're shifting from a recovery phase of the economic cycle towards an expansion in the economic cycle.
And typically when this happens monetary policies transition from being accommodative, which they were last year, to normalising, which is what's happening at the moment, and the market is having to digest that shift in expectations.As this happens market volatility increases and there is a volatility in style leadership between quality growth versus value. We believe that this could continue whilst monetary policy expectations adjust and stabilise.
Company pricing power can protect margins in a high inflation background.
Our view on inflation is that we're looking at a frictional inflation rather than structural. Driven by bottlenecks that we've been seeing in supply chains, disruptions in production lines and in logistics. But we're not going to be clear about this point until the middle of this year, so frictional inflation is likely to last for longer than we initially expected.
The point of focus is wage inflation because that's by far the biggest contributor to structural inflation and at the moment what we're observing on wage inflation is a pickup but not saying that's unusual at this phase in the economic cycle. But we're keeping a close eye on wage inflation as a potential biggest contributor to structural inflation.
In this environment we want to focus on companies that have strong pricing power in this high inflation background because that will help them to protect their margin and the portfolio focuses consistently on companies with strong pricing power.
3. Valuation Discipline and Quality Growth
In a double video, with rising bond yields Zehrid highlights the team’s valuation discipline, and their focus on long-term structural growth.
On valuation it's important to highlight that our valuation framework is long-term. It's consistent in terms of structure and we are using a discipline approach to discount rates.
Our discount rates that we're using are significantly higher than the current bond yields that have been rising in the past couple of quarters. And this ensures conservativeness in our approach and ensures that our fair value assessments do not drop as bond yields increase.
There is stability in our evaluation frameworks, there is conservativeness to ensure that we're not just buying businesses whose upside only depends on low bond yields environment, and that can of course change when bond deals environment changes currently is the case.
Finally the point to highlight is that parts of the quality growth space that could be most at risk in a rising bond yield environment in our view our companies are loss making and whose path to profitability is quite long.
The funds that we manage have got very little to no exposure to this type of businesses. Now where we have exposure the path to profitability is actually quite rapid, based on our forecast.
All of which makes us confident that the stocks that we hold continue to provide an attractive upside and offer us high returns and exposure to structural growth opportunities, that we think are interesting on a five to ten year time frame.
We want to focus on companies that have strong pricing power in this high inflation background.
Regulatory information and risk warnings
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
This document may not be distributed to third parties. It is confidential and intended only for the recipient. The recipient may not photocopy, transmit or otherwise share this document, or any part of it, with any other person without the express written permission of Martin Currie Investment Management Limited.
This document is intended only for a wholesale, institutional or otherwise professional audience. Martin Currie Investment Management Limited does not intend for this document to be issued to any other audience and it should not be made available to any person who does not meet this criteria. Martin Currie accepts no responsibility for dissemination of this document to a person who does not fit this criteria.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets.
- The strategy may invest in derivatives Index futures and FX forwards to obtain, increase or reduce exposure to underlying assets. The use of derivatives may result in greater fluctuations of returns due to the value of the derivative not moving in line with the underlying asset. Certain types of derivatives can be difficult to purchase or sell in certain market conditions.
For institutional investors in the USA: The information contained within this presentation is for Institutional Investors only who meet the definition of Accredited Investor as defined in Rule 501 of the United States Securities Act of 1933, as amended (‘The 1933 Act’) and the definition of Qualified Purchasers as defined in section 2 (a) (51) (A) of the United States Investment Company Act of 1940, as amended (‘the 1940 Act’). It is not for intended for use by members of the general public.
For wholesale investors in Australia: This material is provided on the basis that you are a wholesale client within the definition of ASIC Class Order 03/1099. MCIM is authorised and regulated by the FCA under UK laws, which differ from Australian laws.