Our Market <br/>Conviction Calls

Our Market
Conviction Calls

We have identified five calls we believe will dominate
the global economy and financial markets over
the rest of 2022 and beyond.

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When the going
gets tough

When the future looks increasingly uncertain, investing in quality growth companies with financial flexibility is our preferred strategy.

Read Call 1

Reshoring, restoring
and reassuring

Resilience will be an important differentiator as companies and governments continue to focus on addressing supply-side disruptions.

Read Call 2

Learning to live with inflation

The transitions to more local supply chains and a green economy are inflationary but beyond central bank control, so policymakers are unlikely to hike rates aggressively.

Read Call 3

Renewable
and reliable

The war in Ukraine could and should
accelerate investment in cleantech.
Reducing reliance on fossil fuels
can mitigate geopolitical risks.

Read Call 4



Powering through
thick and thin

Technology improvements across
all themes are speeding up every year,
and shocks like Covid and the Russia/Ukraine
war could accelerate disruption.

Read Call 5
CALL 1: COMPANIES
When the going gets tough
Consensus & Counterpoint

When the future looks increasingly uncertain, investing in quality growth companies with financial flexibility is our preferred strategy.

 

Consensus 

The future is always uncertain, but it feels more uncertain today than it has for some time. It would be
understandable if investors felt that equities were an asset class to be avoided or reduced. Raw material inflation, supply-chain issues and the spectre of trade wars present significant challenges to corporate profits.


Counterpoint

We believe that not only can the best companies continue to prosper in difficult environments, but they can often
lay the seeds for the next season of growth through step-changes in their market position. The key to success in a difficult environment is flexibility and long-term focus. Flexibility comes in a number of forms. Most important is financial flexibility. We have a strong preference for companies with strong balance sheets and high levels of free cash flow. Financial strength gives quality growth companies the flexibility and opportunity to continue to invest through a downturn.
 
Analysis

Let’s consider two examples we hold in portfolios for some of our clients.


Amazon has a well-earned reputation for genuine long-term investment. There is no better example than the online retailer’s investment in warehouse capacity during the pandemic. In 2021, Amazon added 136m sq.ft. of warehouse space. A further 146m sq.ft. is planned for 2022. For context, Walmart, the world’s largest retailer, has 150m sq.ft. of retail space. In two years, Amazon is adding close to double the space that Walmart has built over 50 years. To do this in a difficult environment is a financial competitive advantage only available to the strongest companies, and its benefits can be expected to last for many years.
 
Investment strategy

Illustratively, these examples show why we consider balance sheet strength to be a key characteristic of quality growth companies. 


Key investment ideas
  • Equities over bonds
  • Quality growth stocks with financial strength & flexibility
    • Strong balance sheets
    • High levels of free cash flow
    • Pricing power
 

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CALL 2: SECTORS
Reshoring, restoring, reassuring
Consensus & Counterpoint

Resilience will be an important differentiator as companies and governments continue to focus on addressing supply-side disruptions.

 

Consensus 

The reversal of globalisation has long been spoken about. However, over the past decade companies have been underinvesting in their local markets in favour of lower-cost production centres. In a world of high inflation and moderating growth, this will be another false dawn for the trend of realigned supply chains, business models and economies.


Counterpoint

Governments and companies across the western world are taking active steps to address the frailties exposed in recent years by decades of offshoring and imbalanced economics. We believe this will spur significant investment across strategically important industries to develop more robust supply chains, improve national security and encourage greater energy independence. In emerging markets, China has long focused on rebalancing its economy towards a more domestically focused one while upgrading its manufacturing industry from cheap goods to advanced technologies. These trends are likely to be important drivers of equity returns over the coming year.
 
Analysis

The European and US CHIPS act, America COMPETES acts, EU Industrial Strategy and Made in China 2025 all highlight the concerted effort by governments to diversify supply chains and reshore strategically important industries. The list of areas covered is broad but generally includes cybersecurity, semiconductors, pharmaceutical ingredients, hydrogen and energy. Additionally, given ongoing supply-chain bottlenecks, this is happening at a time when companies are shifting away from the just-in-time inventory systems, synonymous with the ultra-efficient supply chains of the Japanese auto industry, to just-in-case. This is a model that incorporates diversity of suppliers, higher working capital and in-built resilience across supply chains.

In line with the headlines, our analysis of how much companies expect to commit to capital expenditure (Capex) for 2022- 2024 shows that businesses are putting their money where their mouths are. After almost a decade of slowing Capex, there is an expectation of a stepwise increase in Capex spend across the next few years. Governments have also pledged billions of dollars to support industry, which should provide a countercyclical buffer in a world of moderating growth.

Investment strategy

The US market’s strong fundamental characteristics and high free cash relative to Capex mean it has the dry powder to invest in this key theme (US Equity Overweight – TAA/SAA).


Key investment ideas
  • US & EM equities given focus on intangibles
  • Tech hardware (equity), given focus on digital security
  • Industrials (equity), given focus on extra capital expenditure to make supply chains more resilient
 

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CALL 3: THE ECONOMY
Learning to live with inflation
Consensus & Counterpoint

The transitions to more local supply chains and a green economy are inflationary but beyond central bank control, so policymakers are unlikely to hike rates aggressively.

 

Consensus 

Production bottlenecks and input shortages, as well as a spike in commodity prices, will keep inflation elevated for longer. Central banks are behind the curve and playing catch-up, with a quickfire series of rate hikes as well as balance-sheet reductions. Geopolitical uncertainty, while posing downside risks, will neither derail the recovery nor the Fed’s resolve to tighten policy aggressively. The US yield curve will invert again, signalling a higher recession probability 12-18 months down the line, forcing policymakers to stop and eventually reverse course.


Counterpoint

The global pandemic and the conflict in Ukraine disrupted supply chains and commodity markets. But they also accelerated ongoing transitions – tackling climate change and a multipolar world. If there are no further shocks, we believe inflation will likely slow later this year, as demand moderates, the monetary and fiscal impulse normalises and supply chains repair themselves gradually. But it’s unlikely to be as low as in the pre-Covid decade, which was characterised by fiscal austerity and balance-sheet repair. This should allow central banks to slow the pace of tightening in 2023, after several rate increases this year. Emerging markets have already hiked a lot – some are probably done, some may even cut. Longer term, any inflation coming from the green transition and more local supply chains is unlikely to be met with significant rate rises. Central banks don’t control the supply side of the economy, so slowing down demand won’t do much about this.
 
Analysis

Policy rates have been lifted off their record lows (by the Fed and BoE) or may be lifted later this year (ECB). Inflation, while still high, is likely to start moderating as the policy stance becomes more ‘normal’, demand slows and supply expands. Markets are expecting aggressive amounts of tightening, but we think policymakers will eventually take a more cautious approach. In part, this is because ‘killing the cycle’ by crushing demand would be a ‘policy mistake’, as it doesn’t repair supply chains or solve the input shortages.

One of the reasons is that Covid-19 and geopolitical uncertainty are resulting in a faster transition towards energy and production self-reliance. Structurally, while this can be inflationary, it’s arguably something central banks shouldn’t lean against, as it meets broader policy objectives. Emerging markets too, after having front-run the Fed hiking cycle, seem likely to slow the pace of tightening, in some cases even halting or beginning to reverse it (Brazil).

Investment strategy

We expect inflation to gradually move past the peak, but to stay higher than in the 10-15 years prior to the pandemic. In this context, given that we see growth moving past the peak too, we expect fewer rate hikes relative to market expectations and see rates peaking at lower levels than in past cycles.


Key investment ideas
  • Slightly short fixed-income duration
  • Real assets (listed & private)
  • Emerging markets
  • Currencies
    • Neutral USD, GBP
    • Some EUR recovery
    • Weak JPY and CHF
    • Neutral EM FX

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CALL 4: ENERGY
Renewable and reliable
Consensus & Counterpoint

The war in Ukraine could and should accelerate investment in cleantech. Reducing reliance on fossil fuels can mitigate geopolitical risks.

 

Consensus 

During the year leading up to the war in Ukraine, clean energy stocks lagged broader markets while fossil energy stocks outperformed, highlighting the market’s positioning and the recovery after 2020’s recession. High-growth cleantech themes like (green) hydrogen were particularly weak. A number of factors were at play: the rotation from growth to value stocks, reopening demand, tight fossil fuel supply and margin pressures in cleantech. The war in Ukraine has changed the narrative – both hydrogen and clean energy are starting to rebound from the lows and are among the best-performing themes since the war started.


Counterpoint

The market is focused on the short-term need to secure fossil fuel supplies given disruption risks due to the war, especially from a major supplier like Russia. Both fossil fuels and clean energy themes are outperforming the market since the war began – this energy de-risking approach makes sense, especially for 2022. However, if we consider long-term implications, accelerated investments in clean energy and sustainable solutions are much more likely than a major revival of fortunes for fossil fuels. Europe has an acute need to reduce fossil fuel imports from Russia, but other regions have also been affected by high prices. Gasoline prices have risen in many countries (though they recently stopped increasing), while emerging market growth is particularly sensitive to high energy prices. As the effects of the war subside, enthusiasm for fossil fuel energy may diminish. Clean energy and sustainable solutions can enjoy a more robust investment runway for many years.
 
Analysis

Long-term history and the outlook over many years are more important considerations for investing in the future of energy than decisions based on short-term shocks.

Over the last decade, fossil fuel equities underperformed broader markets, and cleantech outperformed fossil fuel equities. Clean energy equities have outperformed the markets since the Paris Climate Agreement was adopted in 2015. This decade, the divergence between fossil fuels and cleantech could be even more pronounced.

Rapidly improving technologies in renewables, electric vehicles, batteries, hydrogen, interconnectors and efficiency working in combination could have a huge impact. Fossil fuels will still be used during the transition to net zero, but demand is likely to be chipped away from many directions.

Investment strategy

Long-term investors should gain exposure to a broad range of energy transition technologies. Themes such as clean energy, electric mobility, hydrogen and energy efficiency could accelerate in the years following the war in Ukraine. 


Key investment ideas
  • Themes such a clean energy, electric mobility and energy efficiency
  • Low-carbon equities
  • Green bonds
  • Sustainable multi-asset funds 

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CALL 5: TECHNOLOGY
Powering through thick and thin
Consensus & Counterpoint

Technology improvements across all themes are speeding up every year, and shocks like Covid and the Russia/Ukraine war could accelerate disruption.

 

Consensus 

High-growth disrupters like video conferencing, fintech and biotech companies that benefited during the first year of Covid have corrected significantly since 2021. Broader tech indices like the Nasdaq 100 are also off the highs. The market continues to debate the impact of rate hikes on valuations and any economic slowdown following Covid. Nevertheless, many mega-tech stocks have held up well, indicating the market’s preference for the largest companies. But investors are yet to be convinced of a strong recovery in high-growth disrupters.


Counterpoint

The long-term outlook for technology and innovation remains robust. Today technology is integral to consumers, enterprises and governments. Investments in innovation continue across multiple areas. Technologies keep improving, whether it be better devices or machinery, functionality or new products/services. Globally, billions of new digital users are expected to connect online this decade and digitalisation continues at pace. Trillions may be invested in ‘physical’ energy transition and robotics. Companies with exposure to future technologies are expected to grow earnings faster than broader markets. Thus, we believe long-term investors should continue to be overweight technology- linked themes. High-growth disrupters saw a major correction since 2021 but this is an opportunity. Many disruptive technologies could become mainstream, so a diversified and long-term exposure to disruptive companies could be vital for future investment returns. Following the war in Ukraine, technology themes like cybersecurity, robotics and automation could accelerate as digital security and supply-chain repair remain in focus.
Analysis

The US mega-tech companies benefit from strong ecosystem moats and long- term demand drivers. Given their financial strength, their long-term ability to offer new products and services remains strong.

Sales growth expectations over the next two years for companies in the Nasdaq 100 index remain in a similar range to recent history (around 9% per year compared to an 8-10% long-term average). Robust private markets also support the march of technology, despite some recent cooling.

Investment strategy

Long-term investors should consider generous exposure to future technologies. Technology is likely to play a major role in solving global problems and in bringing new products and services to the market.


Key investment ideas
  • New areas of innovation
    • Cybersecurity
    • Robotics & automation
    • Semiconductors, Cloud
  • Disruption in non-tech industries
  • US large-cap equities

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Download the full report
The war in Ukraine, Covid-19, and Fed tightening are making the market outlook more uncertain. Read our mid-year Counterpoint investment outlook report to gain insights and understand how we interpret for you investment implications, in this changing world.

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