While we all hope for a quick resolution in Ukraine and the toppling of Putin’s tyrannical reign, the sad reality is that a long and drawn-out campaign, where innocent Ukrainians bear the brunt of the suffering, appears to be how this war is playing out. Putin’s actions have at least united the western world in their shared revulsion and, we hope, the NATO response has been a sufficient deterrent to any further attacks on human liberty.

At a market level, the first quarter played-out as a series of macro shocks, followed by a more constructive last few weeks. Readers may be surprised that the FTSE 100 in fact rose 1.8% over the first quarter, but this masks a wide dispersion of returns at the individual stock level. By a wide margin, it was the oil & gas and mining businesses (BP, Shell, Anglo American, Rio Tinto, etc) that led the market as the events in Ukraine sent oil prices soaring on top of what was already an inflationary environment (more on inflation later). At the other extreme, we see a long list of higher growth businesses that sold-off sharply at the prospect of higher rates. We see this at times indiscriminate selling of such businesses as having been panic-driven and in fact used this opportunity to add to some of our quality growth businesses where shares had fallen sharply.

Rampant inflation and the prospect of rising interest rates is the underlying worry that set markets off to a shaky start in 2022 and this remains a persistent worry. We have two contrarian points to make here:

1. Inflation may not prove to be as bad as the headlines would have you believe and a steep ramp-up in rates is not a foregone conclusion. The maths of lapping 2022’s exceptionally high inflation numbers will likely mean that the 2023 numbers are far less scary, but, more significantly, we see factors such as war in Ukraine, China’s “Zero COVID” strategy, rising mortgage rates and wider fiscal tightening as governments look to recoup COVID-19 spending as material headwinds to economic growth and, in turn, inflation. We are not saying that inflation will go away, but we do think the commentators might have got ahead of themselves. As for rates, we have effectively seen UK rates at emergency low levels since 2008/9, we do not think that the UK consumer is ready for rates far over 2% and the knock-on effect to mortgage bills and property prices would be a political nightmare for the already vulnerable Johnson Government.
2. We want to be owning high quality and growing businesses in an inflationary environment, the idea of switching into “value” stocks right now seems ludicrous. We recently attended a week-long conference where hundreds of UK-listed businesses were presenting and all of the management teams spoke about rising costs, from freight, to commodities, to staff and an increasingly tricky environment to operate across multiple geographies. Against this backdrop, we want to be owning businesses with proven pricing power, best-in-class operations and experienced management teams. Naysayers of this approach argue that rising discount rates (if in fact they do rise materially) should hit the value of quality and growth stocks hardest, we would say that this is far too broad-brush an approach and that we expect quality names to survive and thrive through difficult times, just as we saw during the COVID-19 lockdowns. Quality will out.

The global market sell-off bottomed in the second week of March and, whisper it gently, we have in fact seen stock prices begin to regain some momentum on the lack of any new macro shocks. The market is again finding its feet and allowing the fundamentals to reassert themselves. Strong businesses are continuing to make progress, the US economy is booming and even the oil price has started to moderate. One can never say what is around the corner, but we must take a long-term view and focus on the individual businesses that we invest in. Let us hope for an improved geopolitical situation in the months ahead and hope that we have seen the worst of Putin’s atrocities.

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.