Difficult week for equities
Jun 17, 2022
With Japanese and Australian equities in the red this morning, we can confirm that this week was one of the most difficult weeks for global equity markets since the pandemic hit. Soaring inflation is finally forcing the hand of central banks into reducing their balance sheets and raising rates. This is starting to have an economic impact. On the company side, for example the UK retailer Asos warned yesterday on lower sales growth and profitability as consumers change their behaviour adjusting to the new environment. Stock price closed down 30% on the news for this profitable lowly leveraged franchise trading now at 12 times forward earnings ( a decade low and comparing to 31 times for Zalando ). It is not surprising equity prices suffer as valuation multiples contract due to higher rates while earnings come under pressure. Bonds are not a safe haven in an environment of rising rates. We take comfort in the fact that we are invested in companies with so-called moats that can protect at least part of their profitability in this environment. Their valuations are low and they continue to generate cash flows, resulting in dividends for the shareholders.