Why stability is set for the spotlight in 2023

The primary challenges facing investors continue to be historically high inflationary pressures and high interest rates. Many investors are uncertain where to turn, but if we look at markets through a fundamental lens, equities remain the asset class most likely to deliver a robust return able to offset inflation.

We believe the most successful companies in 2023 will be those with steady earnings and robust balance sheets, which can be stabilising forces against economic weakness and rising rates. Stable equities are typically less economically sensitive than the broader market, as the businesses typically offer products or services that are essential to everyday consumption.

While such companies largely enjoy consistent demand throughout an economic cycle, it is vital to identify companies able to complement steady demand with pricing power. This is particularly important in an inflationary environment, such as the one we are currently witnessing, as those with pricing power are in a far better position to continue delivering sales growth by passing on cost increases.

In addition, it is crucial to target companies with strong balance sheets, which can ensure sales growth translates into earnings growth. Such companies offer an element of inflation protection, without being highly cyclical and vulnerable to recession.

Finally, investors must keep a close eye on valuation –as a stable company is not automatically a stable share. Stable shares need to be trading on fundamentally attractive valuations. In this period of elevated economic uncertainty, we are convinced the market will appreciate the stable stock universe—which is in a better position to withstand today’s inflationary pressures.