Manny Pohl
The past few decades were a golden era for most traditional asset classes. Interest rates steadily declined, and economies expanded paving the way for globalisation and technology innovation. Fiscal and monetary policy enabled continuous growth and expansion, resulting in a stellar run for equities for the past 20 years.
But as the saying goes, all good things must come to an end. Global macro-environmental events including the pandemic and the Ukraine-Russian conflict disrupted this unprecedented run. The pandemic drove supply constraints, which worsened once the Ukrainian-Russian conflict erupted.
The world we now live in is a world shaped by supply. The current inflationary environment is driven by supply-related issues as opposed to excessive demand.
But for investors, the market’s tendency to overreact to short-term events presents a unique opportunity. Investors focused on resilient and high-quality companies that can continue to grow and thrive through these macro-environment events, can gain a degree of comfort amidst market uncertainty, and maximise their chance of robust returns over the long-term.
Impact of macro-economic events
As active investors, awareness around these macro events and understanding the impact they may have on a business’s fundamentals is important, however in our experience, it isn’t always useful in analysing a company’s long-term potential or its operational performance.
The chart below illustrates the impact these events have had on the level of the ASX All-Ordinaries Accumulation Index over the past twelve months.
Some of these events had a degree of forewarning, while others were true black-swan events. While market cycles go through periods of excesses and corrections, it is helpful to put this recent volatility into context. The ASX All Ordinaries Index, which has averaged +3.8% per annum over the past 24 years, finished down -11.1% in FY22, rebounding +6.3% in July. It’s important to note that there has never been a calendar year where the return has been within 10% of the average.
Identifying companies in a market of uncertainty
Being able to identify companies with potential, especially those in the growth stage of their life cycle, is a challenge but key to growing long-term investment wealth. The difficulty lies in being able to separate the narratives from the numbers and isolate the truly exceptional companies from the rest. Investments with a Sustainable Competitive Advantage (SCA) will be well-placed to withstand short-term headwinds, looking at these events as opportunities to maintain, or acquire more market share, ultimately identifying new areas for growth.
For example, CSL Limited (ASX: CSL) continued to invest in plasma capacity despite being impacted by pandemic-related supply reductions. Over time CSL demonstrated its ability to identify new growth opportunities, despite the market situation, and invested in the Chronic Kidney Disease franchise Vifor Pharma.
Similarly, PWR Holdings Ltd (ASX: PWH) doubled down on its bespoke thermal cooling solutions seeing revenues double over the past five years. Through continued investment in technology and capabilities, the company has expanded market applications in their Emerging Technologies division which is expected to grow five-fold over the next few years.
What’s on the horizon?
Market uncertainty continues, sectoral reallocation is still normalising and the transition to net zero carbon emissions is accelerating. Unprecedented macro-environmental factors continue to play a decisive role in business outlooks.
As investors, we examine company financials and growth plans carefully, allowing us to identify quality stocks that are resilient through these challenging macro events, and that will continue to prosper long-term.
Being part of such a connected world means that events that occur on the other side of the globe will spread and eventually impact other markets.
Investing during such times requires a holistic approach. Businesses dynamic capabilities need to be recognised as these empower them to survive and thrive throughout these events.
Taking advantage of the current market uncertainty is not for the faint-hearted investor. The material derates of equity valuations and the expected ongoing volatility presents opportunity for those focused on resilient and high-quality companies.
By Dr Manny Pohl, founder and chairman
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Disclaimer:
The article has been prepared by ECP Asset Management Pty Ltd (ECP). ECP is a funds management firm based in Sydney, Australia. For further information, visit www.ecpam.com.
This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for financial advice. ECP and the Chairman own shares in CSL Limited, and PWR Holdings Ltd. ABN 26 158 827 582, AFSL 421704, CAR 44198.
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