While some of the global challenges that have surfaced this year are due to transitory short-term factors (e.g., recession risks, the Russia/Ukraine conflict), we view others as early indicators of a dramatically evolving macro and investing regime.
The capital markets do not operate in a vacuum. Accordingly, how they have performed this year is at least partly a reflection of today’s broader macroeconomic and geopolitical backdrop — one that is in the midst of being reshaped by powerful forces that may persist or even intensify going forward. Deglobalization, for instance, should lead to sharper dispersions among countries and regions, more volatile currency markets, and worsening trade-offs between growth and inflation. Speaking of which, global inflation could easily be much harder to control in the next 10 years than in the past 10, so defending against it should be a priority for many investors.
The new regime, then, is likely to be one in which borrowing is more expensive, liquidity tighter, the economic cycle less predictable, and consumer and business spending more variable. From an active investment standpoint, this may translate to divergent outcomes for quality growth companies — well-run firms with effective debt and cost management, as well as healthy revenues and earnings — versus others with more vulnerable business models, heavier debt burdens, and less resilient revenues and earnings.
Consider investment solutions that focus on: