1. Monetary Policy
How policy changes as the global economies shift from recovery to expansion.
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.
Why we are focussed on wage inflation as the key indicator of long-term inflation.
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 and disruption 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. At the moment, what we're observing on wage inflation is a pickup. [We’re] 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
Our analytical framework is applied consistently and helps to identify companies with sustainable growth characteristics.
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 disciplined approach to discount rates.
The 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 also 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 a low bond yield environment and that can, of course, change when bond deals environment changes currently is the case.
4. Quality Growth
Why we prefer quality companies that meet our strict criteria for growth and attractive upside.
Finally, the point to highlight is that the parts of the quality growth space that could be most at risk in a rising bond yield environment (in our view) are companies that are loss-making and whose path to profitability is quite long.
The funds that we manage have got very little to no exposure to these type of businesses. And 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 the 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.
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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.