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Talking heads – Three questions on geopolitical upheaval and equity investing

Daniel Morris

In this article:

    Global markets have seen wide swings as concerns over tighter supplies and crimped trade in the wake of Russia’s invasion of Ukraine caused investors to head for safe havens away from risk assets. However, Guy Davies, chief investment officer for fundamental active equities, advises against impulsive action and argues for a focus on cash flows when picking promising stocks.  

    Listen to the Talking heads podcast with Guy as he answers three questions from chief market strategist Daniel Morris on responding to geopolitical turmoil, the prospect of stagflation and opportunities once the dust settles.

    As a long-term equity investor, how do you respond to geopolitical events? What have you done in your portfolios so far?

    I would like to emphasise the need to avoid kneejerk reactions. Macroeconomic developments and concerns are dominating investor sentiment, resulting in market volatility. This can offer investors interesting entry points to build or rebuild positions, but I believe it is important avoid the temptation to trade too much. 

    Clearly, exposures are multi-faceted: for example, assessing geographic exposure in terms of where a company is listed, its physical location and then the composition of its revenues. Taking that one step further, investors need to assess the associated implications: 

    • How do surging energy prices impact inflation?
    • How do these events affect the prospects for economic growth, monetary policy and the shape of the bond yield curve?
    • What do we see as the terminal rates of monetary policy tightening?
    • What is our view on the interest-rate sensitivity of sectors and industries?  

    From a portfolio management perspective, I believe the priority in periods of market distress is to avoid a permanent capital loss. Many of our strategies have established benchmarks, so we also keep a close eye on benchmark relative positioning. 

    Practically speaking, we’re focused on liquidity. That could mean: 

    • Reducing smaller-cap exposure in favour of reinforcing our positions in higher conviction stocks
    • Improving portfolio balance
    • Barbeling defensive positioning alongside high-conviction growth names that have de-rated
    • Initiating or augmenting positions on weakness. 

    A stagflationary environment may lie ahead. How would you construct equity portfolios to take that into account?

    Admittedly, growth is becoming increasingly scare, while inflation is high. So far, we haven’t seen any major corrections to company earnings, even if emerging markets and to a lesser extent Europe are bearing the brunt of the strain of the current situation. That said, higher commodity and energy prices are likely to affect earnings in aggregate.

    Investor sentiment is now focused more on cash flows and pricing power as opposed to growth. In these circumstances, portfolio balance is important: we may expect to see more defensive value areas – healthcare, utilities, consumer staples – do well. Growth names with established ‘moats’, for example in technology, could do well too. Here we’ve seen significant repricing and de-rating. 

    I believe it’s important to emphasise that as stock pickers, we’re able to find good-quality companies that, with identified catalysts, have the potential to become great stocks. I’m thinking about the environmental space, some long duration growth assets that in many instances have been de-rated more than the broader market. These areas have specific catalysts on top of broad thematic interest.

    What are your revised expectations for particular countries/regions/sectors for the rest of the year? Where could you see entry points emerging once the volatility tapers off?

    The positioning for many of our strategies reflects our bottom-up and long-term assessment, which includes considerations of interest-rate and inflation sensitivity, in addition to country risks. 

    Taking a 10 000 feet perspective, here is the view of our positioning: 

    • Style-wise, we remain tilted towards growth; our value exposure is tilted towards defensives over cyclicals
    • We are neutral to slightly overweight financials, that is, neutral on banks and overweight insurance (except for China where we are underweight financials)
    • Within all-cap strategies, our exposure is tilted away from large capitalisation stocks relative to their benchmarks. 

    On sectors, I see entry points in the environmental space and renewables. This reflects an inevitable thematic shift and an increased urgency for energy independency.

    Furthermore, there are opportunities in selected information technology and consumer discretionary names given the combination of deep ‘moats’, the prospect of growth (in a world where growth is becoming increasingly scare) and improved valuations.

    On countries, the focus is on China. Its economy is arguably much further along in the cycle and remains a significant engine for growth, and its market boasts attractive valuations.


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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