Investment letters

After a challenging year in 2022 for global stock markets, the future seems brighter for equity investors with quality growth stocks looking particularly attractive. Portfolio Managers Laure Negiar and Zak Smerczak of Comgest’s Global Equity Investment Team discuss how their portfolio is well-positioned to capture the benefits of pricing power and sector trends that are currently driving growth.

Last year was one to forget for many equity investors, but ignoring the reasons behind the widespread underperformance across global indices would mean missing the reasons to be optimistic for better long-term returns.

2022 was characterised by rising inflation and the subsequent intervention by central banks to control prices by raising interest rates. The causes of inflation increases are well known; as the global economy recovered from its pandemic-related recession, there was increased demand for products and materials, while the conflict in Ukraine forced up commodity prices in the first half of the year.

Such an environment of rising inflation and interest rates is generally detrimental for valuations of growth companies because of their higher duration. Indeed, during the past year there was a clear style rotation away from growth investing towards value, which caused a subsequent downgrade for growth company valuations.  However, we need to draw a distinction between ‘quality growth’ and ‘growth’ characteristics.

We believe such testing conditions may be short-lived, and it is more important than ever to look beyond the valuation multiples to find those companies that will not only withstand rising inflation and interest rates but have the potential to benefit over the longer term.

Laure Negiar, Portfolio Manager for Comgest’s Global Equity Strategy, says: “When interest rates are rising there is a negative impact on the valuation of growth companies. But in times of rising inflation, quality companies see a relative benefit in revenue compared to the rest of the market.”

She adds: “This is because quality growth companies have strong pricing power, little to no debt, strong cash generation, and they will also have sound balance sheets.”

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