1. Monetary Policy
Shifting monetary policies are creating short-term volatility between value and quality growth.
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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.
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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.
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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
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