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Matt Wacher

Strategies for rising inflation and market volatility

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4 minute read

As investors start to confront the prospect of rising interest rates, there are a number of strategies that can be deployed to address the risks of higher inflation and market turbulence.

Global markets are expected to remain challenging for investors as global central banks pivot towards rising interest rates and less liquidity in the financial system.

Volatility drove many equity markets to fall over 5 per cent in January, with US markets down over 10 per cent at one stage. Ten-year bond yields in the US and Australia are now above 2 per cent as central banks around the world flagged moves to hike interest rates. 

In our recent portfolio update, we outlined approaches to steering portfolios through market challenges. 

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The Morningstar Multi-Asset Real Return fund (MARR) delivered a return of more than 4 per cent after fees in January and is currently in the top quartile of multi-asset unconstrained strategies, covered by Morningstar Direct having delivered a 6.43 per cent per annum return since its inception five years ago relative to its objective of CPI +4 per cent (5.99 per cent).

We have a tried and tested process based on fundamental valuations which means we can focus on an investment’s long-term value. This allows us to uncover opportunities in volatility rather than be spooked by it. 

This investment thinking underpinning our team, however, is based on building diversified portfolios with a valuation-driven and contrarian mindset. Investors need to be thinking differently. Getting the best ideas into portfolios can often mean looking through the short-term noise to unlock value. What has worked for investors over the last 10 years is unlikely to work for the next 10 years. 

Our approach is also based on independent thinking outside the market consensus. We had already started thinking about the prospect of higher inflation in late 2020/early 2021 and as such adopted several approaches to address this risk. 

Volatility tracked in January 2022 can provide investors with some of the best investment opportunities that will deliver significant long-term value to portfolios including: 

Energy stocks 

Energy has delivered significant value for the portfolios. The global energy sector has survived some of its darkest days, which saw a negative oil price at one point. Additionally, the longer-term transition towards cleaner energy remains broadly on track despite some concerns about the profitability of clean energy. In fact, European energy companies have been making a meaningful pivot toward renewables.

Energy has been a major success story for portfolios as we were positioned in the sector long prior to January 2022. This meant that we’ve been able to sell some of our position into strength as the idea plays out and redeploy capital into other unloved assets.

Brazil holdings

Brazil is a recent portfolio addition as their bank and mining stocks present exceptional value, particularly relative to their Australian counterparts. In addition, the real (Brazilian currency) is also attractively priced, making this a compelling opportunity.

China tech

A sell-off in Chinese equities over 2021, triggered by a regulatory crackdown, gave investors an opportunity to edge into these big tech companies at a lower valuation than their global counterparts. Major tech names have low financial leverage, which provides diversification against some of the cyclical stocks that are also trading cheap. 

So far this year, the performance of the investments we manage on behalf of investors have held up extremely well by remaining true to our long-term valuation driven process. 

Maintaining this approach, and not being distracted by shorter-term moves in the market and investor sentiment, remains crucial to capturing the investment opportunities that will grow investors’ wealth to meet their long-term investing goals.

Being nimble and prepared to act in times of volatility is, therefore, key to continuing to deliver outcomes in line with long-term objectives. 

We would caution that not every pull-back or bout of volatility is a buying opportunity. Through these challenging times, all prospective investments remain subject to the rigorous valuation-driven process we employ. 

 

Matt Wacher is chief investment officer, Asia-Pacific, Morningstar Investment Management and portfolio manager, Morningstar Multi-asset Real Return Fund.

Strategies for rising inflation and market volatility

As investors start to confront the prospect of rising interest rates, there are a number of strategies that can be deployed to address the risks of higher inflation and market turbulence.

Matt Wacher
Matt Wacher
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Neil Griffiths

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily. 

Neil is also the host of the ifa show podcast.

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