Equity markets had been under pressure right from the start of the year from disrupted supply chains, rising prices and higher interest rates. The war in Ukraine is a tragic event that is hugely destructive and poses far-reaching risks. In terms of markets and economies, the war has brought geopolitical risks while compounding the existing inflationary pressures.
A period of higher inflation may also be supportive for the asset class as data from the 1970s demonstrated how smaller companies can outperform in a period of inflation. It is worth remembering however, that the composition of equity markets was very different from now and developed economies haven’t had to deal with sustained inflation for a considerable period.
While it is important to understand the top-down economic and market forces it can be dangerous to think purely in general terms. Small companies can successfully operate in niche markets, be less subject to broader trends and be more nimble than larger operations. As a result, it makes sense to focus on understanding an individual company’s ability to deliver in the current environment. Talking to management to really grasp the opportunities and challenges they face is key. In recent weeks we’ve checked in with many of our investee companies, exploring how the conflict has impacted their business and seeking reassurance over the safety of staff. These conversations showed that that the experience of Covid-19 had encouraged many companies to actively manage their supply chains to mitigate the knock-on effects from unpredictable events.
In terms of portfolio activity, we’ve not had to make the fundamental shifts in the same way we did when Covid-19 emerged – something that suggests events in 2022 haven’t derailed the broader trend of global economic recovery. We have made some smaller adjustments, however. For example, we sold glass-bottle maker Vidrala at the beginning of the year from the European Assets Trust. This energy-intensive manufacturer had not hedged its energy costs, so a 10% price increase was insufficient to protect profitability and industry-leading margins left little scope elsewhere. By contrast, we added to the holding of Fluidra after the shares sold off with the market fall, as this swimming-pool-equipment manufacturer has end-markets that have been resilient and price-insensitive.
The course of the war is currently unknowable but, equally, any de-escalation allows scope for a recovery in markets and economies.
