Reality Check

Executive Summary

Global equity investors have been hit with a reality check as companies and nations deal with the effects of (1) the supply chain crisis, (2) inflation, (3) the great resignation impact on labour wages and more recently, (4) conflict in Eastern Europe. The MSCI World Index saw its worst start since the financial crisis in 2008, with many growth companies haven initially benefitted from the pandemic decline by over -30% in market capitalisation.

Investors today now have to rethink allocation strategies and selection due to the impact of global inflation. For example, the heightened inflation data across energy, food, and shelter acts as additional tax on consumers and will significantly test the ‘pricing power’ and ‘volume growth power’. Even industries like luxury goods viewed as inflation hedges see a diverging impact across companies. 

We take a top-down macro assessment of how countries are coping with the ripple effects of the four significant themes above. Germany, for example, now has to rethink its energy strategy and may build new LNG terminals at ports and storage facilities, which will impact the fundamentals of various listed LNG equipment companies like Gaztransport and Technigaz. 

The UK faces a structural Heavy Goods Vehicle (HGV) driver shortage and now has to rethink training and immigration policies to boost its driver capacity. Industries heavily dependent on HGV drivers like supermarkets are already experiencing the costs of this shortage. 

The United States faces its worst inflationary period since the 1980s, and its clear interest rate hikes alone would not be enough to deal with the cost-push inflation, and we point to new investments in ports and supply chain capacity as longer-term solutions. 

To aid our analysis of the current global situation, we share some case studies with insights gained from our interviews of employees from the Port of Los Angeles, Tesco, a UK supermarket, Nutrien, a global leader in potassium-based nitrogen and others. 

Although our emerging markets strategy has so far coped well with the market volatility due to our exposure to companies in industrials, materials and oil-producing countries, our Global Strategy’s bias towards growth companies was hit with its worst drawdown. In the last section of this briefing, we explore how we utilise our reality check tools to ensure our portfolios are not exposed to permanent loss of capital from rethinking what we consider as investment risk to the benefits of cash-as-a-call-option. 

Related Posts

Leave a Reply