Everyone has been shocked by the terrible events in Ukraine over the past few weeks. For now, investors are mostly feeling their impact through higher input prices in general and commodity prices in particular. The big question is what the combined impact of higher inflation and higher rates will be on economic growth and profitability.
With plenty of uncertainty around, investors may be thinking about looking for safety in the fixed income markets, but bonds’ nominal returns remain very low. Equity investors will need to be more selective, but we are not downbeat about equities’ prospects. Stocks retain their appeal as they are backed by real assets, which tend to move in line with inflation to a certain extent. What’s more, companies can adjust their prices when inflation bites.
We believe pricing power will be an important theme to look for in Q2, and that value could extend its outperformance of growth. Meanwhile, the US looks more attractive than Europe as it is less impacted by energy-price inflation.