Reasons to be wary?
While there are reasons to be optimistic as economies recover from lock downs, investors are also facing challenges not seen in years – like inflation. Here’s what the investment team at Walter Scott think about it.
Economic and political uncertainty is a constant these days. But the prospect of higher interest rates and inflation are concerns managers at Walter Scott, have not had to consider in recent years. Today, they are.
This may induce bouts of volatility as markets encounter a less- benign interest rate environment. Furthermore, should some of the cost pressures from rising prices endure, corporate profitability may be tested, according to Walter Scott’s Long-Term Global Equity portfolio team.
Such an environment, the managers say, tends to benefit cyclicals (companies whose success varies with the seasonal or economic cycle) and banks. Evidence of this can already be seen by moves in the share prices of such companies in the Spring.
This isn’t surprising, the team say, given the brightening economic prospects and perceived government backstops in place supporting companies through Covid-19. However, the team believes the current enthusiasm for such companies is likely only to be temporary. Far better, they believe, to focus on resilient companies capable of delivering growth over the long term, regardless of the economic cycle.
The future is …
Elsewhere, the team at Walter Scott notes the flow of company results, alongside their own dialogue with company managements, presents a clearer and more reassuring picture. While Walter Scott agrees the ongoing challenges faced by companies should not be underestimated, the investment team has seen a reassuringly strong common strand of resilience. Using digital means to transform and adapt businesses is one such positive.
One long-term growth area the Walter Scott investment team believes to be very much intact going forward is factory automation. The challenges faced last year in keeping production lines running and supply chains intact only strengthened the case for automation, they say.
In the long term, the team acknowledges the challenges facing some companies in the energy sector as investors focus on the transition to a less carbon intensive economic model. While this changing landscape will undoubtedly test certain business models, it also represents a real opportunity for those companies with a “financially credible strategy to transition business models to a more sustainable future”.
Doc ID: 646810