Inflation, rising interest rates and the war in Ukraine caused volatility across global markets and made the 2022 calendar year tough for investors. AMCIL Portfolio Manager Kieran Kennedy reflects upon the year and the importance of investing over the long term.
2022 was challenging for nearly everyone
Throughout the 2022 calendar year, the outbreak of inflation and subsequent aggressive interest rate rises had a negative impact on global share markets, including Australia’s ASX200 index.
There were some pockets of strength in Australia – mining and energy stocks and to a lesser extent banks – all of which have meaningful index weightings. This enabled the local market to hold most of its ground for the year despite major falls in other markets. The weakest sectors in Australia were information technology and consumer discretionary sectors, were as inflation and interest rate rises kicked in, and investors started to reassess valuations and earnings risks.
Ongoing constraints on supply chains was another factor influencing the market over 2022. In the earliest part of the year, supply chains were still being impacted by the pandemic, and the Ukraine war and geopolitical tensions which followed. This added to supply shortages and difficulty in getting goods to market remained. Labour shortages arising from the impact of the pandemic also presented a challenge during the year for many companies.
Although supply chain constraints appear to have eased in the latter part of the year, there are questions now over the strength of economic demand going into 2023.
AMCIL’s portfolio is a solid long-term performer
Our portfolio’s performance over the 2022 calendar year didn’t match the benchmark index. However, this needs to be considered in the context of the previous year, where key holdings that performed strongly last year came under share price pressure as interest rate rose.
When you’re a low-turnover tax aware fund such as AMCIL that invests over the medium to long term in quality businesses, you may be vulnerable to corrections in valuations, as happened over 2022. Although valuations for some of the key holdings in our portfolio eased over 2022, their share prices have risen considerably over the previous five years.
Another factor influencing overall portfolio performance compared to the benchmark was the significant difference in performance between various sectors. For example, cyclical sectors such as resources and energy had a particularly good year as commodity prices rose.
Stocks such as automotive accessories supplier ARB and logistics provider Mainfreight have been among our long-standing successful investments. These companies have generated broadly resilient profits and financial results this year but share prices have declined.
Others, such as kitchen appliances supplier Breville and Domino’s Pizza, are exposed to consumer demand, and inflation and rising interest rates have caused uncertainty in the consumer discretionary sector. We remain comfortable with our investment in Breville and Domino’s Pizza because we believe in their long-term growth prospects and the quality of their businesses.
We’re buying when opportunities arise
We added some new stocks to the AMCIL portfolio over the year, such as ALS, a global lab testing business. ALS provides testing, inspection, certification, and verification services in the commodities, environmental, food and beverage, pharmaceuticals, and healthcare sectors. It’s a company we know well, and it has a good long-term outlook given that compliance and testing requirements around the world are growing each year. ALS has a good asset base and is a leader in its sector, which are among the key qualities that we seek in our investments.
We’ve also been building our holding in Domino’s Pizza and healthcare technology firm Nanosonics.
Domino’s has been a success story for decades. The people who have delivered consistently good financial results at Domino’s over the years are still there, growing the business. Domino’s is extending into larger offshore markets such as Germany and Japan and has good growth prospects.
Nanosonics, which makes products which disinfect hospital equipment, has very good long-term potential to roll out new products in that market. Management takes a long-term view and invests heavily in research and development – two more factors that we find attractive in our investments.
Interest rates the key in 2023
2023 will be about moving through the issues that have arisen in 2022. Recent market performance has picked up as investors anticipate that interest rate rises may be close to peaking. That may be premature, but interest rates are the key. Central banks will keep raising interest rates until inflation is under control.
It’s important because it’s hard to value equities until you know what the price of money is. Also, if inflation persists and interest rates keep rising, it may impact company earnings.
We will continue to invest in companies based upon their quality and our preferred time horizons of three, five and 10 years. We have some cash available, and we will consider appropriate opportunities when share prices are attractive.
The companies in the AMCIL portfolio are generally well positioned, and even if the outlook should soften, we’re comfortable with their performance and the financial results that they’re delivering. The volatility we are seeing in the market is primarily around valuations, not the fundamental quality of the businesses in which we invest.