Equity markets declined sharply in the second quarter with inflationary concerns and tightening financial conditions driving risk aversion in the period. Investors retreated from growth and quality into defensive segments of the market, favoring low volatility, high yield and value.
Inflationary pressure related to supply-side constraints and shifting demand have been compounded by the war in Ukraine and continued COVID disruption. Moreover, there is still much debate surrounding the direction of rising prices as headline inflation levels continue to move higher. We are likely near the peaks of the inflation cycle but unlikely to return to the low levels experienced in recent years given the current environment. Central banks are responding with predictable measures, but are implementing a demand-side response to a largely supply-side problem. Nevertheless, the shift in expectations towards tighter monetary policy is delivering the intended result — slower economic growth and falling earnings expectations.
Global growth expectations have deteriorated and consumer confidence has weakened, but activity levels around infrastructure, supply chain reshoring, and “green” capex remain positive. Analyst earnings forecasts generally remain constructive in Energy, Materials and segments of Technology and Industrials, while the Consumer segments are seeing downgrades as advertising slows and the effects of inflation and war are realized. This edition of our newsletter follows on the heels of our latest white paper, where we explored three climate transition examples.
As businesses continue to invest heavily in climate transition and innovation, it is our general belief that firms with strong strategies and sound fundamentals will position themselves to generate long-term returns in the future. Both of the articles in this newsletter are specific examples of these themes. The first article outlines the importance for companies to prepare a climate transition strategy and the second article describes the digital transformation strategies being deployed within the consumer world.
