Global conflicts, elections, inflation and interest rates – it is a troubling time for investors. Earlier this month, we were asked by Jeff Prestridge, personal finance editor of the UK’s Daily Mail and Mail on Sunday, about our thoughts on investing in the current environment. Our World Stars Global Equity strategy has continued its strong performance, driven by our long-held conviction of investing in companies that have great quality and can compound over the long-term, and we appreciate that Jeff featured it in his recent article on how to increase your wealth after the UK elections. You can read the Mail on Sunday article here.
Our view is that it is also a time of opportunity. Inflation is moderating, the European Central Bank, the Bank of England and others have started to cut rates and the US Federal Reserve has said that it may cut rates later this year, and many stocks are cheap.
Economic growth is more robust than many expected and employment is strong. Many people are facing higher mortgage rates and wages have not kept up with inflation, but we believe this gap will narrow fuelled by labour shortages and continued significant demand for goods and services. That is good for the global economy because with higher wages, people are going to be able to buy more goods and services. Meanwhile, governments and companies are going to have to keep investing because global public and private infrastructure is as old as it has been and we are like in Eisenhower’s 1950s in terms of our ability to apply the technologies we have developed to renew our infrastructure, increase capacity and address some of the big challenges we face.
This environment of solid economic growth, moderate but sustained inflation and normal interest rates is something to look forward to, not to be afraid of. But it does mean investors have to think hard about how to preserve and increase the real value of their assets. Bonds now provide positive real returns, which is better than the negative returns they delivered before, but it’s still not enough.
The answer is investing in quality companies that are driving global growth and prosperity, that can grow because of the industries they are in and the innovation they can deliver, that have pricing power to increase their own prices, that have scale to offset cost increases, and that have strong balance sheets and generate cash so they can invest and act to take advantage of opportunities. Scale and diversification also matter. Investing in global companies means less exposure to what happens in any particular country at a time of fracture and upheaval. The recent elections in the UK and France are examples of the political and economic uncertainty we face and global portfolios will be more resilient because they are positioned to diversify that risk.
