2Q2022 Strategy Insights
War, Inflation, the Fed and China Top List of Concerns
Concerns that war and higher inflation and interest rates could pressure global economic growth have weighed heavily on traditional growth sectors year to date. Value-oriented investments have rallied. Energy, materials and financials names have outperformed, while longer-duration, traditionally growth-oriented sectors, such as information technology and communication services, have seen multiples compress.
Surprisingly Strong Company Results
Earnings reports at the beginning of May continued to demonstrate resiliency of demand and the ability to pass along rising costs. And companies in the airline and leisure industries were among those still enjoying a lift from the post-COVID-19 economic reopening. However, company managements expressed worries about the persistently high costs of commodities, especially oil, the strength of the dollar and geopolitical uncertainty.
We see opportunities in both cyclical and secular names. We continue to invest in companies exhibiting sustainable growth, driven by secular and idiosyncratic opportunities, and a favorable risk/reward situation. We are also finding opportunities in companies where growth may be supported by improving cyclical demand.
Hear directly from our investment team on performance, portfolio positioning and the market environment. Read key takeaways from the replay below.
Russia-Ukraine Conflict Clouds Outlook
The war in Ukraine has been analyzed in many different ways and is adding to supply chain issues for many industries, including food production. The risks are obviously heightened for economies in Europe, which are more closely tied to the Russian economy and its goods and services.
China’s Zero-COVID Policy
While some countries are beginning to relax pandemic-related restrictions, China continues to follow a zero-COVID policy to keep the virus from spreading in the country. Lockdowns are contributing to delays in the global supply chain and to inflationary pressures worldwide.
Challenging Times at the Fed
Higher commodity prices, particularly in energy, are inflationary in the short term, hurting consumers and businesses. The Fed’s path for further interest rate hikes to help rein in inflation is complicated with the war in Ukraine and China’s COVID-19 policy threatening to cause a significant slowdown in global growth.
Maintaining Fundamental Investment Process
The portfolio holds both economic reopening beneficiaries and secular growers. Our approach has led us to invest in companies where we believe fundamentals are in the early stages of inflecting higher, helped by economic normalization. We expect that top-line growth for many of these companies will reaccelerate and potentially revert to pre-COVID-19 levels. In certain cases, earnings will also be boosted given that many of these companies have also improved their cost structures during the pandemic. We have selectively added to our exposure in certain businesses levered to travel, leisure activity and cyclical economic expansion.
Secular Growers Remain Well Represented
The recent health crisis reinforced the sustainability of many secular trends, such as digitization, cloud computing, 5G network rollout and data center expansion. Other opportunities, such as the trend toward vehicle electrification and autonomous driving, continue to gain momentum and remain attractive.
Beneficiaries of Rising Interest Rates
The portfolio has exposure to businesses within the financials sector (e.g., lenders and insurers) that would benefit from higher interest rates. We have assessed the impact of higher rates on other areas, such as REITs and housing, and we remain confident that those companies will be able to offset inflationary headwinds via sustained revenue and earnings growth. The portfolio retains a neutral exposure to the leverage factor.
We recognize that there are still many uncertainties and risks. As always, we are diligently monitoring our portfolios.
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