Short-term volatility, but long-term opportunities, available for quality growth investors
Mark Heslop, Fund Manager, European Growth, explains why pricing power is important when identifying companies that can survive periods of market volatility and emphasises the importance of patience when investing over the long term.

Year to date, the shift in market leadership from growth stocks to value stocks has been extreme, driven by the almost unprecedented rate at which bond yields have risen; a consequence of significant inflationary pressures in global markets and central banks raising interest rates. However, it is important to put events in context, and one must remember that growth stocks have enjoyed a fantastic bull market over the past few years. Given the various challenges humanity faces around the world, the volatility we are seeing in markets is hardly surprising. The most important question to ask yourself as an investor is; ‘is this a good place to invest going forwards?’, and I believe that it fundamentally is.

 

Why is this? As investors with a bias to quality companies, our approach is very much based on identifying the highest quality companies where the business model not only drives long term value creation but also enables them to withstand challenging economic environments. We’re looking for companies that have very strong barriers to entry, sustainable competitive advantages and exposure to long term secular growth as opposed to focusing on near term economic cycles. When you go into periods of economic shock these are the types of companies that will be resilient and be able to ride out the ensuing volatility. The very best companies even further strengthen their relative market positions in such challenging periods.

 

How do we find these companies? We believe that the key is to identify companies with sustainable pricing power, that comes from meaningful and durable competitive advantages. In the current market environment, where inflationary pressures and slowing economic activity are increasing the likelihood of a recession, these are the companies that will be better able to pass on cost inflation to their customers.

 

Another point to consider is that of growth. We aim to get exposure to long term themes and companies that have the ability to reinvest excess returns and compound shareholder value over many years. This is fundamental to what we are trying to achieve in our portfolios, and in order to achieve this we are patient investors.

 

There is a huge amount of uncertainty in the market at the moment, which largely boils down to long-term inflationary expectations, how aggressively central banks will hike and what impact these factors will have on economic activity.  If bond yields continue to rise, then equity markets will likely remain volatile and company valuations will continue to adjust to the new environment. However, even at present valuations there are great opportunities available to long-term investors willing to look through the current volatility.

The value of active minds: independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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