Written by Paul Loudon, investment manager at Walter Scott & Partners and part of the team that manages the BNY Mellon Long-Term Global Equity Fund
While rising market uncertainty and geopolitical risk present potential investment headwinds, a tight long-term focus on investment in high-quality companies could help investors navigate risk to secure longer-term gains.
Amid swirling inflationary pressures, higher interest rates and heightened geopolitical risk in the Middle East and Ukraine, global investors could be forgiven for taking a wary view of today’s equity markets. Yet we believe investors have always faced periods of risk and that a longer-term focus can help them navigate choppy market waters.
This environment is nothing new.
Now, more than ever, there are lots of threats and concerns re-emerging and potentially impacting equity markets. That said, while we are living in uncertain times, we would argue this is nothing new. In fact, there is always some degree of uncertainty across markets. We believe the key thing is that investors keep calm, don’t panic and stay the course while remaining true to their core philosophy.
We can point to the long-term resilience of equity markets to see this. The historic upward ascent of equity markets has come despite short-term setbacks ranging from the global financial crisis and shock market events such as 9/11 – to living though the worst global pandemic in over a century.
With this in mind, we believe investors should remain tightly focused on investing in quality companies in order to capitalise on longer-term market appreciation and growth.
Despite all of the high-risk and often scary scenarios we have seen, markets have marched relentlessly higher over time. We believe the sheer ingenuity and endeavour of humankind will continue to prevail, allowing companies to build economic value, creating attractive opportunities for patient and committed investors.
While short-term predictions and investment decision-making can often prove unreliable, staying the course over the longer-term can hold the key to generating more resilient and substantial gains.
Market noise
In our view there is so much noise and randomness in the short-term that predicting which companies and sectors will do well in six months’ time is almost impossible.
What is possible is finding companies that can deliver value over the long term. To do this, investors need to be consistent and ‘stick to the knitting’ of their philosophy and investment process. It can be tempting to try and chase returns but discipline and patience tend to deliver their own rewards.
While advocating a long-term investment approach, we believe it is crucial to invest in high-quality companies with positive growth prospects and which are run by highly competent management teams. This should offer more chance of long-term gains and help insulate investors against potential bouts of market volatility.
Investing in quality assets and equities is more important than ever in volatile markets. If you are a long-term investor, it is no good being invested in low quality deeply cyclical or loss-making businesses which could well lose money.
In our view, time is the friend of quality businesses and the enemy of inferior businesses. We would argue that investors should seek out and gain exposure to companies that enjoy supportive tailwinds that can help them grow over the longer term. Quality companies with high returns on capital and strong balance sheets will, we believe, stand the test of time and will also tend to perform strongly during turbulent times.
Technological advancement
From a sectoral perspective, we see a raft of new opportunities being created in areas such as artificial intelligence (AI) and industrial automation which can only grow over time.
AI is absolutely at the forefront of helping companies cut costs and boost productivity. As our societies age and wage bills go up, industrial automation is increasing and companies that can automate processes are really benefiting.
As an enabler of AI itself, advancing semiconductor quality technology and the miniaturisation of semiconductors are key and could, we believe, create many attractive new investment opportunities in the future.
Walter Scott & Partners is part of BNY Mellon Investment Management
