Although there is understandably a lot of focus from clients right now about the level of inflation in the UK, the US is not far behind, hitting 8.6 per cent In May, just 50 basis points behind the UK.
Both figures represent a 40-year high.
While most active equity managers would highlight company-specific fundamental factors as the key drivers of their investment decisions, Ron Temple, co-head of multi-asset and head of US equity at Lazard Asset Management, says the reality is that each company operates against a larger macroeconomic backdrop.
“The economic cycle clearly drives customer behaviour, as well as the corporate decisions that result from the expectation and realisation of economic acceleration and deceleration.
“Likewise, changes in expected and realised inflation also affect the decisions made by customers, corporations and investors. Through the first half of 2022, two primary macroeconomic drivers were most prominent in driving share prices: monetary policy and discount rates, and growth expectations and fear of recession.”
Michel Perera, Canaccord Genuity Wealth Management CIO, agrees. “The US market is driven by concerns about inflation and a Fed-induced recession. In theory, as inflation concerns increase, bond yields rise, then energy, financials and industrials are expected to do well. As recession gets priced in, yields fall and technology improves.
“In practice though, markets are still favouring energy and defensive sectors, almost regardless of the macro backdrop, because there is more guarantee of oil prices rising and the economy slowing than of yields moving in one direction or another.”
Although considering the macroeconomic environment is important when investing in the US market, Fidelity International portfolio manager Matt Egerton, adds that it is difficult to have strong conviction in the macro and the direction of inflation and rates.
“In such an uncertain environment we think it is important to step back and look at some of the structural trends in the US market, one of which we think very clearly is sustainability.
“In our view, sustainability is about much more than just the environment. It is about resource efficiency, productivity, equal opportunity and access to finance as well as health and wellbeing.”
Daniel Roarty, AllianceBernstein Sustainable Thematic Equities CIO, agrees. “Predicting the twists and turns of the economy, price levels and monetary policy moves with precision is no easy task. Fortunately, perfect macro forecasts are not required to create value over time.
“Instead, we believe investors should focus on durable themes centred around the world’s biggest long-term challenges, which can have remarkable staying power in the midst of geopolitical and economic volatility.
“Our sustainable themes are powered not by the fleeting confidence of consumers but by massive secular tailwinds, including global pledges for net zero emissions, the generational push for essential healthcare services and the needs of a growing global population for food, shelter, financial security and infrastructure.
