How managers of global equities are prepared for rising inflation

  • Tweet
  • Share on LinkedIn
  • Share via email
  • Print
  • Download

February 2022
 

Walter Scott managers of global equities look at how a focus on quality may help offset this year’s sour start of the equity markets and ongoing challenges, such as inflation.

Higher inflation is not unsettling Walter Scott managers of international equities, as they believe a focus on companies that are able to improve productivity and pass on rising costs to consumers likely will dilute its impact.

By year-end December 2021, the US Consumer Price Index (CPI) reached 7%—its biggest jump since June 1982.1 As a result, the Federal Reserve (Fed) has been forced to start tightening its monetary policy, most likely in March, to combat rising prices.

Managers at Walter Scott have assessed the impact of an inflationary environment on global equities and believe that particular holdings “have strong and durable growth drivers which could insulate them from the impact of cyclical or structural inflation.”

Further, “The global equities team notes that many companies may benefit from inflation, given their pricing power. The team highlights that inflation could drive growth for certain technology firms because it encourages the customers of such businesses, across a range of sectors, to improve efficiency by subscribing to or implementing new technological services and products.”

The Walter Scott global equities team notes that one of the world’s largest software companies, for example, is about to increase its prices by 10–25% for a product suite that helps customers improve productivity.2 The team also cites that a U.S.-listed publishing software company has seen aggregate price increases of 5% per annum.3

The managers further point out how certain consumer goods firms can “flex their pricing muscles.” A French-listed luxury goods business, for example, has seen annual price inflation of 5–7% for decades for certain products within its handbag range.4 “The company’s luxury products enjoy a certain amount of demand inelasticity, so putting through price increases to mitigate inflation shouldn’t be an issue,” the team says.

The team also expects healthcare companies to show defensive qualities as inflation rises. They point to a Swiss-based global pharmaceutical business with a “world-beating” oncology franchise which they believe should fare well because its end markets work within a defined legislative framework, covering price adjustments for raw materials or indirect cost increases.

In addition, the team notes that a Danish firm, according to the team, should stand up well in an inflationary environment thanks to its high margins and the fact that its products are integral to the treatment of diabetes and obesity.

Looking ahead, Walter Scott managers expect volatility to continue in equity markets owing to ongoing concerns over economic growth related to the Omicron variant and supply-chain issues, as well as central banks tightening monetary policy.

Jane Henderson, CEO at Walter Scott, agrees the start of the year has not been a pleasant experience for equities, and notes that there are challenges ahead. She adds: “The prospect of higher interest rates, stubborn inflation, and rising global political tensions have soured the start of the year, with a variety of hitherto strongly performing market sectors posting sharp declines from recent highs. We can’t second-guess what might happen next in markets, and indeed our investment horizon is measured in years rather than months. Whatever the equity market backdrop, our focus is on sticking to the fundamentals with an approach that’s weathered more than a few market tempests.”

The Walter Scott investment team notes that a low level of demand-led inflation with only modest hikes in interest rates would be positive for equities. However, if inflation continues to “stalk the economic landscape” in the near term, quality companies that enjoy higher margins, pricing power, brand strength, secular tailwinds, and low financial gearing, are well placed to counter its impact. “These are qualities that typify our holdings and are what we look for in a company whatever the economic backdrop,” the team says.

1 “U.S. Inflation Hit 7% in December, Fastest Pace Since 1982,” The Wall Street Journal, January 12, 2022.

2 Quarterly Report, Global Commentary, Walter Scott, December 31, 2021.

3 Ibid.

4 Ibid.

 

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this communication and subject to change. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation.

BNY Mellon Investment Management is one of the world’s leading investment management organizations, encompassing BNY Mellon’s affiliated investment management firms, and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.

Walter Scott & Partners Limited (“Walter Scott”) is an investment management firm authorized and regulated in the United Kingdom by the Financial Conduct Authority in the conduct of investment business. Walter Scott is a subsidiary of The Bank of New York Mellon Corporation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. BNY Mellon Securities Corporation is a subsidiary of BNY Mellon.

© 2022 BNY Mellon Securities Corporation, distributor, 240 Greenwich Street, 9th Floor, New York, NY 10286.

MARK-249689-2022-02-22