Outlook – Carousel ahead


Quality companies as a safe harbour during inflationary times

Transitory or not? That’s the main debate going on around inflation, which jumped substantially in the second half of 2021 (fig.1), forcing investors to anxiously monitor monthly announcements of the next batch of the related statistical data. In fact, there is no point in guessing how fast the inflation figures will subside. The key focus should be on making sure that one has an excellent selection of the companies in the stock portfolio. In the inflationary environment, the ultimate winners are those companies that have evident economic moat and unquestionable competitive position offering high value-added products. These are the firms, having Quality style characteristics, that are able to pass cost inflation to their customers and, therefore, continue to deliver excellent financial results and grow total shareholder return. Given that there are many price-taking companies in the broader market indices, it is imperative to concentrate on the innovative and competitive price-making enterprises to earn alpha returns, especially when producer and consumer prices are on the rise.

Fig.1. Consumer prices, Y/Y change, not seasonally adjusted; Source: Hérens Quality AM

Quality as the Winner in Value- Growth Contest?

Growth stocks have been outperforming value stocks for each consecutive year since 2007. However, last year we saw that the throne of growth stocks was not that solid anymore and typical value industries, such as Energy and Financials, managed to outperform, although growth still succeeded in beating value in the end. The reason behind value-growth rotation, which might become more evident in the future, was that Central Banks began tapering bond purchases and considering lifting interest rates. Higher interest rates negatively influence fair values of high growth companies and, on top of that, it would mean more expensive debt servicing, which might hurt fast expansion intentions. So, we would probably see a seesaw between value and growth next year.

Flee to Value, however, should not bother quality investors even if a certain part of their holdings have a Growth style tilt. Quality companies, having significant economic moat, excellent managerial talent, good cash flow generation ability and a substantial amount of recurring revenue, are fundamentally robust and well-established to stick to their fast development plans.

Metaverse as a new dimension of development

Deeper digitalization and workplace revolution reinforced by the pandemic was the final step needed to make next wave of tech evolution finally possible – adoption of the metaverse. What used to be a decade-long dream of fiction writers and technologists is now virtually at the arm’s reach. The term “metaverse” has literally exploded in the second half of 2021, with Facebook even renaming itself into Meta Platforms to reflect its commitment to build this virtual world, where people can live, work and play. With consumers all over the world already being comfortable with usage of VR headsets, creation of virtual avatars, spending billions of dollars on digital clothing and accessories and purchasing NFTs, the foundation for the metaverse is laid. Of course, substantial investments are still required to perfect the technologies, but given that big players like Microsoft, Roblox, Epic Games among others have already committed to the development of their own metaverses, this future is already at our doorstep.

Digital space shift is going to be particularly relevant for the B2C companies, which have huge marketing budgets, parts of which are to be dedicated to the expansion of corporate footprint in the metaverse. For instance, Nike and Adidas are among the early birds to be present in the metaverse: Nike created Nikeland, virtual world designed for Nike fans on Roblox, while Adidas has earned $23 million selling its Adidas Originals: ‘Into the metaverse’ collection. No doubt metaverse will be the next big thing, having huge impact in the corporate space.