07 Jun 2022
2022 has offered investors little respite, with macroeconomic, geopolitical, sustainability and pandemic-related concerns to contend with. Against a backdrop of persistent inflation, increasingly hawkish central banks and high political tensions from the Russia/Ukraine conflict, how should equity investors best navigate markets? Janus Henderson’s equity specialists explore the implications for investors and discuss where they believe the opportunities lie.
The Russian invasion of Ukraine has arguably been the biggest setback for markets in 2022 so far and remains a powerful influence on markets today. So, how has this conflict changed the investing landscape in Europe? European equities portfolio manager John Bennett believes the Russian invasion of Ukraine marks a paradigm shift towards localisation of supply chains and tangible investments into energy, infrastructure and defence. It also challenges the arbitrary environmental, social and governance (ESG) score-carding approach which has seen companies ‘struck off’ for imperfect ESG profiles, instead opting for companies with sky high valuations. In today’s world, John believes that investors may once more be required to ‘care’ about company valuations in a manner that has been somewhat elusive over the last decade.
For US equity investors, inflationary pressures in the system may underscore a preference for companies with established supplier relationships and strong competitive advantages which, in turn, may help them pass along higher input costs so as not to sacrifice current profit margins. To date, strong demand and short supply have allowed companies to largely pass labour and raw material cost increases on to consumers. However, as labour comes back to the workforce and supply chains are repaired ‒ pushing costs back down ‒ it will be important to closely watch company profitability and how businesses navigate a new pricing environment. Johnathan Coleman and Nick Schommer, US equity portfolio managers, believe that differentiated, well-managed and reasonably valued growth companies with track records of innovation and profitability may be better able to navigate near-term market uncertainty while they capitalise on long-term trends.
Elsewhere, real estate can be a particularly useful asset in times of uncertainty. While property will certainly not be immune to the changing macro-economic landscape, its ability to provide more dependable income streams, diversification benefits, and inflation protection over time, may prove to be useful for investors. REITs manager Guy Barnard believes that pricing power and balance sheet strength will be key differentiators for property equities in a slowing growth dynamic. Similarly, Andy Acker, portfolio manager and healthcare analyst, believes that the defensive characteristics of healthcare could also be beneficial in a rising rate, slow growth environment. He noted that large-cap pharmaceutical companies, drug distributors and health insurance companies – that function almost independently of economic activity – all outperformed in the volatile first quarter of 2022.
While much of 2022 has been coloured with political division, the global response to climate change has broadly been one of unity. Progress in the sustainability space has grown rapidly as the need for sustainable products and services becomes more apparent. Technology equities portfolio manager Alison Porter considers technology to be the science of solving problems, and as a result, a key enabler towards a more sustainable world. Innovation in technology offers exponential leaps in progress that provide solutions to major environmental and social challenges worldwide. Hamish Chamberlayne, Head of Global Sustainable Equities, believes that today’s backdrop of higher inflation may actually prove to be beneficial to the growth of many sustainable companies, as it makes the economics of sustainable businesses more compelling and accelerates the level of investment into the low carbon energy transition.
Companies in the energy, mining and agricultural sectors are at the heart of this transition to a lower carbon future. Tal Lomnitzer, Global Natural Resources portfolio manager, believes that many of these types of companies can drive a level of carbon reduction across the global economy, such that they eclipse their emissions footprint. While this transition will require investment and innovation at an immense scale, the outlook for the natural resources sector and its potential to change the world for the better is an exciting prospect.
While nobody can predict what the second half of 2022 may hold, we believe our portfolio managers are best equipped to hear through the noise and navigate short term volatility to produce favourable long-term results. To hear more from our equity investment experts, sign up to Janus Henderson’s Invested in Connecting Equities Forum: https://go.janushenderson.com/Invested-in-Connecting-Equities-Forum
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