Slow growth market requires attention to subtleties not bold scenarios

12 January 2022

Margaret Lawson, fund manager of the SVM Asset Management UK Growth Fund, discusses how investors need to be wary of chasing trends as economic growth slows.

January is a time for forecasts and diets – both little discouraged by history.  Market predictions may be well intentioned, but tend to emphasise bold scenarios rather than the subtleties that drive how events actually play out. Simply expecting more inflation or central bank intervention may not help investment analysis. Central banks are hard to call, but politicians are all too predictable. The 2021 climate rhetoric might be quickly cast aside if a full-blown energy crisis develops.

More might be gained from deeper analysis about exactly how this could impact companies, the bond market and politics. Falling real wages and negative real interest rates are powerful forces. The squeeze on real incomes should start to hit consumer demand, despite generally high levels of personal savings.

Fortunately, many well managed businesses are focused on government spend; improving efficiencies in services and investing for sustainability. Despite the headwinds on technology and growth, there are growing companies rooted in the real world with visibility on demand. Resilience in portfolios may depend on how well portfolio companies are underpinned by actual trading.

In contrast, many asset-heavy sectors may see cash flows pick-up strongly initially, but history points to the challenge of maintaining capital in the face of inflation. Negative real interest rates make bad investment projects look profitable – incentivising businesses to destroy capital. For a period, the change in inflation will cause distortion in company reporting, as leads and lags work through.

Not all growth businesses are jam tomorrow. Many provide needed services in a proven business model, enjoying a moat within their niche that helps to protect margins and profitability. But in each sector, active investors need to compare old with new.

Some disruptors have inflated valuations; and there are older businesses with the cashflows to allow a pivot in their business model. For example, oil and gas majors may be best placed to implement a green agenda and invest in alternative energy. Traditional auto companies may win out against Tesla. The finance and banking sectors offer some similar comparisons.

Passive investing – with a blind faith in the supposed wisdom of market capitalisations – may be about to repeat its mistakes of 2000 and 2007.  Size alone is a poor guide to value.

2022 may be a year in which investment judgement is rewarded – there is often less need to be smart on the way up. As growth slows, the dangers of trend following become clearer.  Passive investing might begin to look riskier, more of a lottery.

Professional Paraplanner