Chris Hogbin:
Few investors would’ve anticipated the very strong returns we’ve seen, particularly in the US market. Although we’ve had a number of surprises, whether that’s inflation, supply-chain disruptions or, more recently, the reemergence of a new variant in the pandemic. What we have seen throughout the year is strong economic growth and very strong earnings growth across a number of companies in the portfolios we invest in. We still expect good earnings growth, more moderate than the levels we’ve seen in 2021, but that should set us up for a market that can continue to progress from here.
When we have situations like supply-chain bottlenecks, when we have loose monetary policy, it can be easy to be fooled into thinking that companies are earning a normalized rate of return, but actually they’re benefiting from those extreme conditions. So the key, as we analyze individual companies and industries, is to really understand what is the normal earnings trajectory of those firms and look through some of these temporary effects that we’ve seen in the last year. And really forecast out what’s going to happen to those companies over three to five years from now, once a lot of these risks or uncertainties have been resolved. What we have seen though is that the US market has performed incredibly strongly. It is important to sort of diversify, particularly given how concentrated the market has become both here in the US, but also other markets around the world. In China, we’ve had a market that, like the US, was very concentrated around a small number of technology names and then performed very poorly in 2021; that creates an opportunity to identify stocks to invest in.
In Europe, we would expect a continued cyclical recovery. We think the valuations look more attractive, but again, it will come down to individual companies and industries that we want to invest in. Responsible investing continues to gain increasing mindshare with investors around the world. There are two sides to that: One is looking through the ESG lenses to identify risks in a portfolio. The second is to look through the same lenses to identify opportunities in a portfolio. When we’re looking at ESG issues, we don’t just want to talk about them, we actually want to gain insight around what’s really happening.
