4Q 2021 Global Equity Outlook: Positioning for the Upside, Protecting Against the Downside

Quality Growth Boutique
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Positioning for the Upside, Protecting Against the Downside

CIO Matthew Benkendorf explores risks in China, the consumer staples sector and the impact of inflation.

 

  • Global equity markets were essentially flat in the third quarter despite negative news. The low interest rate environment is driving returns, and weak economic data that might typically worry investors can be interpreted as monetary policy likely to remain looser for longer.
  • While there are issues in China affecting businesses today, the market is catching up with the reality that has existed there for a while. It may swing further and over-appreciate the risks in the Chinese markets. However, we believe long-term opportunities still exist in China. With more than 4,000 listed companies, it is possible to find a selection of businesses with good track records and strong growth prospects. Investors may get more exposure at attractive valuations if weakness persists.
  • In our view, quality consumer staples companies are predictable, durable and can deliver high-single-digit or low-double-digit returns driven by earnings growth. However, the market for consumer staples has become tougher due to changing consumer behavior and consumption patterns. COVID-19 has added to the challenges for those companies. We feel they continue to play an important role in investor portfolios and show their real resilience in a downturn. Coca-Cola is an example of a consumer company that we think has a good portfolio and pricing power and has also worked to restructure internally and become more asset light. And with the alcoholic beverages space, there are opportunities for premiumization and can help to develop portfolios with pricing power and positive consumption tailwinds.
  • Some industries inherently have low visibility over the impact of inflation. For example, labor cost increases in hospitality, or staffing shortages in manufacturing can lead to production bottlenecks. Inflation also has a more direct impact on capital intensive industries and is longer lasting as companies need to invest more at higher prices. Such industries tend to have less pricing power by nature.
  • We believe stable and predictable businesses are important in a portfolio for when the market turns down, as well as offensive companies for when markets are growing strongly. It is possible to find quality companies with good visibility across a range of sectors today, such as health care, consumer staples and technology.

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About the author
matthew_benkendorf

Matthew Benkendorf

Chief Investment Officer Quality Growth Boutique, Portfolio Manager

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