Markets and portfolios have recently been unsettled by surging inflation, rising interest rates and the Russian invasion of Ukraine.

With these crosswinds, uncertainty is higher than normal. As has served us well previously, we are focused on higher quality companies that deliver earnings growth in a variety of macro-economic environments.

We remain exposed to our long-term investment themes where the fundamental growth case remains intact or in some cases has improved, such as secure and sustainable energy.

First, fundamentals

Overwhelmingly, the feedback is that despite generalised weakness across the market, there have been no operational issues with any of the companies in which we are invested. They are delivering sales and earnings that are either in line with or ahead of the market’s expectations. In many cases, share price weakness has led managers to selectively add to their favoured holdings.

Inflation: pressures continue

Inflation was originally expected to be transitory. But higher goods prices created through unusual pandemic spending are now being compounded by the rising cost of food and energy, which is the main economic impact of the war in Ukraine. As such, it could be that employers need to raise wages to attract and retain staff amidst a cost-of-living crisis.

Higher wages could lead to higher prices. That said, we do not think we have entered another 1970’s style wage-price spiral. But, when inflation settles down, it could do so at an elevated level compared to the pre-pandemic period.

Ukraine: A prolonged conflict

Part of the reason inflation could remain elevated is because of developments in Ukraine where a prolonged war looks likely to further disrupt energy and agricultural commodity supplies.

Remember COVID?

We are reminded the pandemic is still with us as several big cities in China grapple with various degrees of lockdown. China has stuck to its zero-tolerance approach to COVID, now markedly different to how much of the rest of the world is living with the disease. As it did back in 2020, this will add renewed pressure on company supply chains.

Portfolio changes

The path of inflation has been highly uncertain, so we have adjusted portfolios steadily over the last six months. The key changes have been to reduce exposure to the most speculative growth ideas and focus on higher quality companies with steady earnings, such as consumer facing businesses, those with strong brands and pricing power. We also increased exposure to companies that do well in inflationary environments.

All of this has helped to act as a ballast to other parts of the portfolio, which have faced continued headwinds from rising interest rates.

Looking ahead

With a long-term view, these disruptions are redrawing the contours of the global economy. Companies are reconsidering their international supply chains, seeking robustness and resilience at the core. These production networks are the outcome of 20 years of investment, so they can’t be replaced in an instant. Nor would dismantling them make much sense given the enormous consumer markets that exists to be served in Asia.

For now, it is portfolio resilience on which we are focused; making sure there are different parts that will respond well to the changing market environment and that can take advantage of a market rebound.