The Transition to Net Zero: A Challenge for Central Banks
Highlighting the potential consequences for inflation in the euro area over the transition period to net zero, and implications for monetary policy.
Elevated market volatility drove a sell-off in global equity markets in the first quarter. Europe was hit hardest with a deep sell-off from the invasion of Ukraine. Emerging markets were weak given rising geopolitical uncertainty, a strengthening U.S. dollar, and increased concerns over Federal Reserve tightening. The panic and reflux trade post invasion is now over and markets have shifted their focus back to general macro drivers. Going forward, emerging market regions that have already cycled through macro drivers, like central bank tightening, may offer better growth opportunities.
We continue to find the best growth opportunities clustered around the same secular themes we’ve seen drive market leadership and profit growth over the past two years. But, we’re not going to fight the tide (or the Fed). Instead, we are focused on finding secular growth opportunities that can weather the changing macro environment. Examples include:
On-demand consumption. Consumer brands with direct-to-consumer (DTC) business models are thriving. In particular, high-quality European consumer brands have been strong. They’ve been pioneers in the DTC movement, giving them strength in distribution control, inventory management, and pricing power. The resiliency of these brands is even more important in uncertain times like today.
Digital payments. While not a new theme, enablers of digital commerce continue to see robust results given the continued rapid growth of e-commerce.
Enterprise technologies. Higher valuation cloud-based software application companies may be prone to more valuation pressure as the Fed continues to raise interest rates. But prominent cloud-based service providers continue to see strong demand and have also seen valuations compress to reasonable levels, making them attractive investment options.
Health care technology & therapies. The market sell-off in the first quarter created an opportunity for health care companies that were not COVID beneficiaries, but could be beneficiaries of the continued economic reopening and increased demand for various treatments that were delayed because of the pandemic. These areas tend to be less cyclical and could shine as Fed tightening takes a bite out of economic growth.
Downside risks have risen, limiting tactical investment opportunities – but prime real estate is well-positioned to weather whatever comes next.
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Past performance is no guarantee of future results.
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