Markets 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 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.

Taking a long-term view

It’s important to remember that market fluctuations are an essential ingredient of investing – share prices and the stock market can overreact in the short term.

Investing in assets such as equities will generally provide the best returns over the longer term. Reducing your equity exposure and moving to cash requires being right twice – when you get out, and when you decide to get back in. Far too many people become tentative about getting back in and miss long periods of gains.

Soaring inflation also means cash is getting less valuable. To stay ahead of inflation, the stock market is still the place to be to give your money the best chance of doing that. The longer you stay invested, the more potential your money has to grow – and recover from any setbacks along the way.

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 may lead to higher prices.

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.

Covid-19

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

With inflation prospects uncertain, 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 that typically enjoy 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 your 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, we are focused on resilient portfolios that are flexible enough to capture changing market opportunities, whilst aligning with your long-term investment objectives.