At AFIC’s recent Annual General Meeting, Chairman John Paterson and Managing Director Mark Freeman addressed the current uncertain market environment and reiterated why AFIC’s investment approach is appropriate for the times.
As we have seen on several occasions in recent years, markets have produced surprises at a time when investors were contemplating more stable conditions, in this case, post the COVID disruptions.
For the first time in many decades, we're experiencing sharply rising inflation, which is exacerbating the efforts of central banks to normalise interest rates.
We know that some of the impact of high oil prices, high food prices, and supply chain disruption will wash through, and we may see lower inflation numbers 12 months out, but the level at which inflation stabilises will be a major driver for where interest rates ultimately settle, and this is currently unknown.
We have experienced high inflation previously; inflation took off in the 1970s and was sustained for most of the 1980s.
There are a few observations to make. The period of inflation acceleration alongside rising interest rates is particularly disruptive as there can be lags for companies in recouping cost increases in their pricing. Also, valuation downgrades are very uncertain because the ultimate level of interest rates is unknown.
The attributes one wishes to see in successful equity investments in this environment are companies with low debt, strong market positions which give them pricing power, and quality executives and boards who are adaptable in an uncertain business environment.
Investing in good companies becomes the best defence against the corrosive effects of inflation on wealth and we believe these characteristics are evident in many of our investments.
There may be more volatility in the market, but our portfolio is positioned to perform in a wide range of operating environments, and weaker markets provide an opportunity to add quality stocks to our portfolio at attractive prices.
That is AFIC’s approach and the key to investing success over the long term.
At the end of the day, our portfolio is invested in well-managed, quality companies that own strategic assets with strong balance sheets, and that's what always give us comfort that we are well placed irrespective of short-term market cycles.