Introduction - Angles & Perspectives Q4 2022

Introduction

Investors have been keen to bid farewell to 2022 and the extreme volatility that dogged markets over the past year. However, while many are hoping for a return to ‘normal’, it is important to remind investors that the last decade or more was anything but normal by historical standards.

Ultra-loose monetary policy and high levels of liquidity have had a profound impact on the behaviour of markets over the past decade. It caused prolonged distortions in asset prices, elongating market cycles and reinforcing the impression among investors that we had reached a ‘new normal’. It heightened the attractiveness of especially speculative assets while starving other areas of interest and investment. The severity of the market distortions that resulted should not be underestimated.

However, as higher inflation started exerting pressure on central banks to normalise interest rates in the aftermath of the Covid-19 pandemic, these distortions have started to unwind. The result has been nothing short of market mayhem. Even seasoned market professionals found 2022 a challenging year.

The danger for investors is that they withdraw from markets after an emotionally bruising year. While we believe that markets are likely to remain volatile for some time, we do not believe that simply retreating to the safety of cash is the answer. Ironically, shifts in market cycles offer exceptional opportunities for investors who are willing to maintain an open mind and invest with an eye to identifying the market leaders of the future.

To do so successfully, investors need to partner with differentiated thinkers who are well positioned to look beyond the short-term noise. We believe our 3M philosophy, with its emphasis on investing in quality companies at below their intrinsic value, puts us in an exceptional position to identify and maximise such opportunities for our clients.

In essence, we see a vastly different and exciting future lying ahead. In the first article Regime change in markets: a capital cycle perspective, Head of Research Kevin Cousins argues that while the previous decade was one of extremely accommodative monetary policy, we are now in a much tighter liquidity environment. As liquidity returns, investors should ask whether we will see money flowing to new market leadership. Our view is that the sectors that drove the previous market cycle will be relatively poor investments in the future. Those who position their portfolios for a return to the status quo that prevailed during the previous market cycle, are likely to be disappointed.

Fund Manager Shaun le Roux, Analyst Gavin Rabbolini and Co-CIO Greg Hopkins argue in Why global investment capability is going to be critical for local portfolios that the prevailing backdrop amplifies the importance of having a broad universe from which to pick investments that are likely to work in the future. More choice and good selection will dramatically improve the likelihood of producing good returns at acceptable levels of risk.

Lastly, Head of Equities Justin Floor sheds light on how we use these insights in our funds, in Capturing the potential upside of shifting cycles. Our aim is to tilt the odds in our clients’ favour when it comes to exploiting the opportunities that we believe lie ahead.

We trust that you will find these articles insightful, and their guidance valuable in these turbulent times.