On 7th June, the World Bank lowered its global economic growth forecast for 2022 to +2.9%, a 1.2% point downgrade from its January forecast of +4.1%. In relative terms this is a big reduction in expected growth for the global economy.
In its latest Global Economic Prospects report, the World Bank said: “The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid.”
Stagflation – a period of low growth and elevated inflation – is an outcome for the economy that investors should be prepared for.
This updated economic outlook warrants a reiteration of the investment strategy we outlined in an earlier Weekly Brief (26th April): “Investing in businesses with resilient characteristics, trading at attractive valuations. Understandably, there are not many of these investment opportunities out there. But they are there if investors look hard enough (or if they invest in a fund strategy that does the looking for them).”
The last sentence in the above extract is now even more important than it was six weeks ago. As high inflation makes cash a negative return asset and multiple headwinds hit financial markets, the current investment climate is not one which supports a passive investment strategy. Broad exposure to market risk works well in times of stable and predictable economies, less so when the opposite is true.
We continue to believe that the time-tested strategy of focussing on investing in profitable companies with healthy balance sheets, which can maintain pricing power, trading at reasonable valuations, with exposure to structural growth in demand, is the solution to navigating volatile markets. Further, volatile markets create unique opportunities to invest in those same companies at lower prices, and thus higher long-term expected returns.
Lower economic growth and higher inflation are not a forgone conclusion for the global economy. This is simply a potential outcome which is becoming more likely. Higher than expected growth and lower inflation is also a viable outcome too.
Rather than trying to predict accurately which potential scenario comes to pass for the economy, investors must build portfolios that can perform well over the long-term, through periods of economic volatility, as well as stability. In practice, this means averaging in, over time, to actively managed strategies which are taking actions to mitigate risk exposure in the short-term, while investing in high quality businesses at a reasonable price for the long-term.
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