WHY STOCK SELECTION WILL PLAY A GREATER ROLE IN PORTFOLIO PERFORMANCE GOING FORWARD?
BY LONDON & CAPITAL
In the first half of this year, economic growth has roared back. With it, equities have delivered another period of strong returns. While we remain constructive on returns going forward, we believe stock selection will play a far greater role in portfolio performance – rather than the economic backdrop.
- Inflation and growth are now peaking and will decelerate from here on.
- This suggests the stock market cycle will move from the early-stage sharp recovery phase into a more normal environment. In these conditions, the impact of the economy will play less of a role in equities’ performance, with stock-specific factors instead driving performance.
During the strong recovery phase in the first five months of this year, the economically sensitive areas of stock markets delivered the strongest returns. This trend partially reversed from mid-May as so-called growth stocks rebounded, through to the end of June.
In terms of portfolio construction: it will become appropriate to reduce the more economically sensitive areas of exposure. This is even more crucial as the economic revival moves from a recovery in goods to one in services.
However, it is very clear that this cycle is moving at superspeed due to the unique nature of a pandemic. There is still considerable uncertainty. In terms of our equity portfolios, we will be focused on owning high-quality compounding socks that are more resilient to a variety of outcomes.
Looking ahead, we anticipate that returns will be in line with longer-term averages for stock markets. In our view, the most probable outcome is for markets to re-enter the levels of growth and inflation we’ve seen following the global financial crisis. Therefore, annualised returns are likely to be mid-single digit, as opposed to the recent period of supernormal returns.
To find more about the latest house views from London & Capital’s Investment Desk, read the full AndPapers Q3 2021 here.
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