At number five, it's inflation.
Despite easing inflation, there remains a risk of persistent pressures from many angles, with wage inflation being the predominant driver. This sticky inflationary backdrop can put downward pressure on corporate margins. So in our view, critical to focus on companies that have pricing power and are able to protect their margins effectively.
At number four, it is interest rates.
We believe that most central banks have peaked or are close to peaking, but we do not expect any pivot towards cuts in Western central bank rates until the second half of 2024. Neither do we expect them to hit their inflation targets until 2025, and the central bank's data driven approach could further drive market volatility. And when rate cuts do happen, we believe this will provide more support for equities, particularly quality growth stocks in GPT (Global Portfolio Trust).
At number three, it’s earnings.
Economic growth is at risk of weakening. The US and Chinese economies are slowing down after a strong 2023, partly due to the effect of last year's rapid interest rate rises. Stagflation in Europe and UK is set to continue. Company earnings forecasts for 2024 seem optimistic to us. This brings a risk of downgrades. In this backdrop, we believe investors need to focus on companies with resilient earnings. Those that can deliver positive surprises, notably if helped by exposure to structural growth drivers.
At number two, we have valuations.
Valuations remain more supportive in Europe and Asia and continue to provide an attractive valuation opportunity versus their long term historic averages and when compared to US equities. Valuation discipline remains paramount at all times and more so at this stage in the economic cycle. A stocks specific focus when assessing valuations is always key to us.
Finally, at number one, selecting structural growth stocks.
We believe investors need to focus on companies with strong structural growth opportunities. We highlight three areas of focus. Energy transition, ageing population, and artificial intelligence. There is the ongoing focus on investing for a transitioning world towards net zero and the seismic shift brought on by artificial intelligence. Innovation rates are likely to continue to increase and with it disruption risk to traditional businesses is likely to continue to rise.
These themes have sizable long-term drivers and are facing an important investment cycle. Looking at these themes across a whole ecosystem of companies that are exposed to them is a way to capture the most attractively valued opportunities that fit our requirements as quality growth investors.
What Are the Risks?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.
Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.
References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund’s holding at any one time.
For illustrative/discussion purposes only. It is not a recommendation to purchase, sell or hold any particular security. It is neither indicative of any portfolio holdings at any one time nor reflective of current or future portfolio holdings. Past performance is not necessarily indicative nor a guarantee of future performance.