As we begin a new year, Nick Clay, Head of Global Equity Income at Redwheel shares his views on how investors can navigate the path of high inflation to stay ahead, through a global equity income strategy – highlighting three factors which investors should study to cope with this period of inflation:
- Valuation – think very carefully about valuation. No matter how enticing the top 5 weighted businesses in S&P are, with wrong valuations, they could become the riskiest ones. If you pay attention to the valuations of your stocks when volatility picks up in the market, it will help lower it in your strategy versus that in the market.
- Compounding income – Change the way you think about the market for the market backdrop has changed. Over time, compounding income will return to dominate returns.
- Dividend Growth – Consider companies with pricing power. Companies which can increase their dividend to compensate investors, by increasing their prices. Sectors to consider include consumer staples and luxury goods (e.g. Kate Spade, Coach, P&G, Nestle)
It seems clear that the phenomena of zero interest rates and “get rich quick” from the past 15 years is now potentially over. We’ve found ourselves in a different investing environment today, and getting out of this bear market will ultimately depend on inflation. Inflation is now everywhere around the world, it’s been around for too long, and is building into people’s expectations. Waves of inflation last created market volatility in the 1970, and the latest Fed statements in November 2022 backed up the likelihood that we are in an environment of rolling inflation.
A Global Equity Income strategy aligns with the return to a more normal investment environment, in which we generate a total return over time. When the ‘get rich quick’ environment comes to an end, we can remind our clients that we grow wealth slowly, and that is how we have always done it. Global equity income gives you a strategy which although tends to underperform when the market goes up, in times of market volatility, tends to outperform. You get a strategy that spits out companies that have a better balance sheet, generate better cashflow and are cheaper than the market. This strategy will therefore be highly appropriate in this inflationary and volatile world we find ourselves in as we kick off in 2023.