The SS&C ALPS Advisors research team meets formally to discuss investment topics on a weekly basis, and informally much more frequently to share our research and current thinking. We strive to provide honest and realistic perspective across asset classes writing recently on inflation (too high), supply chains (messed up) and slowing GDP growth (bad for earnings).
Telling it straight – the good and the bad – is important, investing is a serious and difficult job. However, our world isn’t binary. It’s subtle, nuanced and often has many sub-plots to the primary story. And the primary story right now is inflation and the Federal Reserve’s response – but most readers knew this already. For that reason we’re taking time today to write about a few of the sub-plots we see as important in spite of the current broad-based de-risking and asset price declines. We’ll call these sub-plots rays of sunshine peeking through the storm clouds.
• Investments with pricing power are an increasingly important element to protect long term investor purchasing power in an inflationary world.
• Liquid, shorter term investments with reasonable current yield create options for investors to react when opportunities arise – and we think this environment will create many opportunities.
• Identify areas of the market with improving fundamental momentum, in times like today they will stand out and be appreciated as unique.
Pricing Power Protects Against Inflation
The SS&C ALPS Advisors Multi Asset Research Team has written extensively on the topic of inflation. We believe there is ample evidence inflation will be stronger and stay for longer than current market expectations due to the amount of empirical evidence supporting that view. Inflation is insidious to retirement portfolios, silently eating away at long-term purchasing power. Fortunately for investors there is an antidote!
Any asset with pricing power and the ability to offset inflation has a special place in investor asset allocations today. Pricing power can come from either being a source of the inflation – think of commodities – or it can come from inelastic demand for the good or service – think of consumer staples, indispensable healthcare or even a well-deserved family vacation.
Keeping Some Dry Powder (and getting paid along the way)
The range of potential reasonable outcomes, sometimes referred to as the Overton Window, is as wide open today as it has ever been. As the Federal Reserve shifts from an accommodative policy stance supporting economic growth to a stance focused on fighting inflation we are entering into an investment world most professionals have not seen in their careers. Expect surprises as well as fantastic opportunities for the long-term investor.
Keeping some dry powder in the form of highly liquid, short-term focused (not too risky) investments makes a lot of sense during times of uncertainty and change. Fortunately as the market has anticipated higher rates, the yield on short-term debt instruments are not that different from long-term debt. In other words investors can stay liquid and opportunistic while getting paid some income along the way. And when long-term opportunities arise the savvy investor can take advantage.
When Times are Tough the Good Look Great Relative to Everything Else
When the economy is rocking and investor risk appetites are strong the tide tends to lift all boats. Investors become a little less discriminating and are willing to look at the 2nd, 3rd or even 4th derivative on a theme to keep up with the market. Conversely as revenue growth slows, margins come under pressure and investors tend to get more discriminating. We believe we’re entering into the discriminating phase of the investment cycle, if not today in the relatively near future.
We found it interesting within the recent inflation report that certain areas of the economy remain firmly in growth mode – some examples include travel and the broader service economy, clean and fossil fuel energy, and the agricultural sector. Investors can benefit from identifying areas of strength and selectively finding ways to invest as we believe positive fundamental strength will stand out from the crowd.
Rays of Sunshine
Storm clouds formerly on the horizon arrived from the very beginning of 2022; performance across asset classes has been difficult so far this year. Fortunately we think there are some rays of sunshine peeking through the storm clouds investors should consider. Pricing power, getting paid for optionality, and uniquely positive fundamentals are rays of sunshine in what so far has been a very dark and stormy year.