How would you summarise global markets in 2023 so far?
The first half of this year was in marked contrast to 2022, with growth stocks very much back in vogue. This sharp reversal is much like what we have seen since the start of the Covid pandemic in 2020 - the market has had to contend with an economy lurching from one extreme to another, through lockdowns, re-openings, supply chain blockages and unprecedented stimulus.
This has created a very challenging backdrop for investors to navigate. On occasion the market was sufficiently dislocated for us to make more pronounced changes to portfolios, but in the absence of such opportunities we currently favour a more balanced approach, allowing individual stocks to drive performance.
How have we benefitted from our differentiated investment approach?
So far in 2023, we have benefitted from two key features of our investment approach. The first has been our holistic and inclusive view of sustainability factors: we have been able to identify attractive companies across different sectors, regions and styles, allowing us flexibility to adapt to different phases in the market.
Secondly at an individual company level, the strong stakeholder relationships shown by our investments have allowed them to navigate this challenging environment better than most.
What are the likely key external drivers of markets in the second half of 2023?
The two most important external drivers that we will remain focused on during the second half of this year are inflation and geopolitics. While inflation is on a declining trajectory, there is still considerable tightness in labour markets worldwide which means it is unlikely to fall all the way to targeted levels. Where it settles out will be crucial in determining central bank policy, in particular, where interest rates head. This is still hard to predict.
On the geopolitical front, the continued war in Ukraine is top of mind. While the outcome is highly uncertain, what is clear is that governments and companies are rethinking their supply chains and investing in more local production which in itself creates opportunities.
We are always looking for opportunity amidst the uncertainty, and for individual stocks that have strong drivers and attractive valuations.
Why a sustainable approach to investing is now more important than ever before?
We have seen time and time again over these turbulent years that companies that have strong relationships across their stakeholders have outperformed their peers operationally.
Take suppliers – in normal times all customers can get access to components, but when supplies are constrained, vendors naturally favour the customers with whom they have good relationships, allowing those companies to continue to fulfil their orders. This may only be financially relevant every few years, but it underlines the importance of understanding a company’s approach across all stakeholders.
Quality companies that are run for the long-term, taking into account their impact on all of their stakeholders, not just their shareholders, are likely to be more resilient within challenging market environments. They are likely to experience lower downside risk due to the lower risk of operational disruptions. We have long argued that ‘companies do not operate in a vacuum’ – never has this felt more true.
Sustainable investing is not just about a company’s financial success, but how it achieves that success. The importance of considering all stakeholders is intrinsic to the approach. It is only by investing in truly sustainable businesses that we can achieve consistent investment returns over the long run. This continues to be our focus.
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