The start to 2022 has been a volatile one for investors, with rising inflation and rising interest rates. In short, it is a difficult time to be an equity investor.
Many areas of the market which led the recent 10-year-long rally have fallen away, which lead investors to wonder what comes next.
In this special edition of the FTAdviser podcast, sponsored by Artemis, contributing editor David Thorpe is joined by Fahad Hassan, chief investment officer at Albermarle Street Partners, and Alex Illingworth, joint manager of the Artemis Global Select fund and the Mid Wynd Investment Trust.
Illingworth said: "Nobody knows how high inflation will go or really how long it will last, and obviously in a period where inflationary pressure is growing it is not normally a great environment for managers of risk assets.
"So I think two rules apply for equity managers at a time like this and that is: make sure your eggs are spread across different baskets while avoiding areas which struggle with inflation such as labour intensive industries."
Hassan said down cycles can be very sharp, which will have caught investors off guard particularly with regards to the actions taken by central banks to raise interest rates, but he said the next risks would be those associated with slowing economies.
He said: "Slowing economies cause risks to corporate profits and that is the next shoe that everyone is waiting to drop.
"Corporate earnings estimates haven't yet started to come down in a meaningful way and what we are expecting is for corporate managers to come out in the next couple of quarters to reassess how fast they can grow those profits and that is something that could have a knock-on impact on equities as we look into the second half of the year."
Illingworth said for the past decade, diversification and attention to valuation had not really been necessary, but he said this was no longer the case.
He said: "Value for money probably did lose its central role in the latter part of the bull market.
"I would say that today we do feel a number of share prices can be justified by today's earnings and that's almost even though we know we face higher rates and we face potential recessionary issues. They have to be companies that can look after themselves I would certainly say a lot of the valuation destruction has already happened.
"That might not be a cue to go and buy stocks quite yet and I wouldn't go as far as to say all the bad news is in the price but we are in the midst of a change of sentiment and approach to equities and that process, from experience, can be quite elongaged so I think valuation has to play a much more central role in the months to come."
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