Higher for longer

Yesterday’s US inflation figures provided another reminder that inflation remains a concern, and so does the outlook for interest rates.
As the chart illustrates, the upward trend in US Treasury yields remains intact. Bonds are becoming increasingly attractive, but expecting a rapid and sustained decline in interest rates appears premature.
We continue to view this as part of a broader normalisation process following years of exceptionally accommodative monetary policies and abundant liquidity.
The cost of capital matters again. Companies relying on excessive leverage and inexpensive refinancing will increasingly face pressure on their earnings and valuations.
This environment is consistent with our investment philosophy, which has always emphasised strong balance sheets, sustainable cash flows, disciplined capital allocation and reasonable valuations.
After 30 years of managing equities, I remain convinced that the ability to generate sustainable returns without relying on cheap financing is a fundamental characteristic of a quality business.