Market volatility remains high given events in Ukraine. The invasion is likely to have a significant human toll, and our thoughts are certainly with the people in Ukraine.
There are several potential paths from here, though of course we are hopeful that an ‘off-ramp’ is found that helps to de-escalate this crisis. The scenarios we are considering include everything from the international isolation of Russia except for its energy & agricultural exports through to military and cyber warfare that spills beyond Russian & Ukrainian borders.
We believe our exposure to high quality companies at the core of our portfolios will lend themselves well to any scenario, since these companies are “all-weather” in nature, i.e., they have solid business models, high margins, strong pricing power and defensible earnings.
Additionally, the investment case for long-term trends is unchanged by these events. We still face a climate crisis, people are still ageing and suffering from diseases that need medical solutions, whilst technology innovation continues to disrupt all sorts of industries while also creating new ones. From the perspective of underlying fundamental growth in sales and earnings, we are confident with the investments currently in portfolios.
In the case of the climate crisis theme, current events lead us to believe we will see an acceleration in earnings for associated companies. Europe (and the world) has taken a big body blow and made these countries realise that reliance on Russia for energy is a geopolitical mistake. We expect Europe to focus on securing borders in the immediate term, while also ramping up investments in energy security (alongside energy sustainability).
What matters for equity markets (and individual companies) in the long terms is corporate earnings. So, while we expect our portfolio companies to continue to deliver on this front, the fundamental value of these businesses will continue to grow. What might suffer in the short term, is the market value, which as we know can deviate from fundamental value (in both directions) from time to time.
Based on current market values and the expected earnings growth of our portfolio companies, we are seeing several our underlying expert fund managers increase their investment in their highest conviction ideas at these more attractive, lower valuation levels.
From an overall asset allocation perspective, we are remaining calm and ensuring we are balancing risk exposures within portfolios for a variety of future scenarios. The market is highly volatile now and could lurch from one scenario to another (and back again) very quickly as news flow and events develop.
It is therefore more crucial than ever to remember we invest in capital markets for the long term; we must avoid making hasty, emotional decisions when portfolio values drop – the pain is always the worst just before things improve; when things get tough, we must focus on the fundamentals – and if growth expectations remain intact here (which we think they do), market values will recover in time.