A new reality for investors
There’s a new reality taking shape in global markets.
Many commentators are focusing on the rotation from growth to value, but I think that view is too simplistic. Some investors may be hoping for a return to normal after central banks stop raising interest rates and inflation subsides. In my view that’s not the path forward due to several seismic shifts that will likely define the next decade of investing.
From falling rates to rising rates: Inflation is at its highest levels since the early 1980s and, until recently, we’ve had 40 years of declining rates. As rate cycles reverse, the process often takes much longer than anticipated, which leads me to believe that some inflation will likely persist. Consequently, I’m wary of highly leveraged companies. Money isn’t free anymore, so a larger slice of earnings will go to service debt. And companies able to fund their own growth will remain particularly attractive.
From narrow to broad market leadership: The last decade of investing was dominated by a handful of internet-related companies. This overshadowed the fact that you can’t build a new economy without older industries. While digital-first companies are not going away, I think investors will start to place greater emphasis on producers of physical assets. Moreover, I expect broader market leadership to emerge among a variety of companies, which should provide a positive backdrop for stock pickers over indexers.
From global to regional supply chains: The globalization of supply chains is another multi-decade trend adjusting course. For a generation, companies moved manufacturing overseas to cut costs. But the limitations of placing efficiency over resilience are now clear. Growing geopolitical tensions and pandemic-induced disruptions have prompted companies to create supply chain redundancies so that a single breakdown won’t derail an entire operation. Such capital investments may help inspire a renaissance among smartly managed industrial companies.
I could describe additional shifts rocking the economy and markets, but suffice to say we are living through a historic period of change. The outlook has evolved from a decade of sunny skies to darker clouds. That may sound like a pessimistic view, but I see it as an exciting time to be a fundamental, bottom-up investor — unrestricted by geographies, sectors or style boxes — and better equipped to adjust to this new reality of investing.