Investors concerned about rising inflation and slow growth should avoid making rash moves away from shares, but should rather tilt their portfolio mix to stocks from high quality companies backed by reliable consumer spending, according to a boutique Australian investment manager.
Montgomery Investment Management chief investment officer Roger Montgomery said the future direction of inflation and economic growth was unknown and market indicators were not consistent in providing guidance.
“Even before the war [in Ukraine] began, markets were processing the inevitability of accelerating increases in rising interest rates alongside the reality of quickening inflation,” Montgomery explained.
“The post-pandemic surge in demand, amid a supply chain unable to keep up, has caused inflation rates that have most central banks on the hop.”
He added that while investors were optimistic about rising demand for goods and services, they were also pessimistic about the implications for valuations from inevitable increases in interest rates and from a possible economic slowdown.
In this environment, he suggested timing markets successfully and consistently was almost impossible so jumping to cash would be a dangerous move.
“In any case, returns from equities have proven to be superior to cash over the long term and even during the two world wars equity returns were positive,” Montgomery noted.
“What an investor can do, however, is ‘tilt’ or ‘shape’ their portfolio.
“One might, for example, reduce the proportion of ‘moon shots’ and increase the proportion of high-quality businesses with pricing power – those with inelastic demand for their goods or services and those able to pass on to consumers the higher costs of production and supply.”
He said history had shown which sectors had fared better than others and recent research conducted by UBS into periods when inflation was high and growth was moderately slow indicated which sectors outperformed and underperformed the market.
Those that outperformed were food staples, retail, healthcare and personal products, pharmaceutical and biotech, banks, real estate and energy, while those that underperformed were the communications, information technology, automotive, insurance and utilities sectors.
Montgomery acknowledged markets had moved from being high growth and high inflation to low growth and high inflation, but any further negative changes would leave few sectors untouched.
“If another step down in growth is experienced – and stagflation becomes a reality – all sectors lose ground, including defensives, but returns in tech, energy and real estate fare the worst,” he said.''