Hello. This is Jeremy Richardson from the RBC Global Equity Team here with another update.

January’s been quite a month with awful lot amount of market volatility. And this is really stemming, I think, from this tension that we’ve seen between inflation on the one hand and interest rate expectations on the other.

Investors, for a long period of time, have not really had to think about the consequences of inflation. But with the exit from the pandemic, I think investors are now beginning to ask what longer-term normal looks like in terms of monetary policy. Will we still need low interest rates? Will we still need quantitative easing and large amounts of fiscal support for the market if, as we all hope, that the pandemic is passing into the rearview mirror? And if we don’t need that, then actually, there needs to be a period of adjustment in front of us.

And that is creating a high degree of uncertainty and an element of rotation within equity markets as investors are trying to reposition their portfolios to take account of rising interest rates. And we have seen a significant shift in expectations.

So, at the end of 2021, the market was looking for between three and four interest rate increases in the U.S. over the course of the whole of ‘22. As I sort of speak to you today, that is now at least five interest rate increases that the market is looking for.

So a very significant shift in interest rate expectations, but a consequence of that though is that we’re seeing a flattening of the yield curve. So long-term inflation expectations seem to appear to remain relatively well anchored at around 2.5 to 3%, which means that we’re seeing this sort of flattening of the yield curve.

Now, this actually could act as a constraint on the Fed in terms of what it chooses to do, because the Fed, I’m sure, will feel a degree of reticence actually to push that yield curve into inversion, which is usually a signal for recession.

So equity markets, they have got a lot to think about. You know, will the Fed go too far? Will the yield curve invert? How secure do we think about economic growth? What’s the right portfolio for these difference scenarios? And you can see sort of the very sort of macro top-down-driven market that equity investors are left to face.

Not all bad news though. I think there are some positive arguments out there. And one of the main positive arguments is that maybe inflation doesn’t last. I hesitate to use the word transitory. I’d leave that to the economists. But it does seem though that listening to what companies are saying, there is a shift in consumption going on, away from goods towards more services and experiences.

I think many of us will have spent the pandemic ordering stuff online and keeping those delivery drivers busy. And we will look forward to spending our freedom actually going to restaurants, cinemas, taking a holiday this year for goodness sake. You know, these things will actually see dollars and money move away from the consumption of goods towards the consumption of services and experiences, relieving pressure on really tight supply chains and allocating consumption to areas of the economy which were enjoying excess capacity.

That may mean that we might be at the point where inflation today is at a high watermark. And if that is the case, then the gap between inflation and the interest rates needed to tame it, instead of actually expanding, which they have been for the last three to four months or so, should start contracting. And if we do see that, then that may mean that the amount of volatility that we’re seeing in the market, the amount of uncertainty, the range of potential outcomes that investors will face may start to diminish.

And I think that could likely be a very positive dynamic not only for the market, for investors, but also for stock pickers like ourselves because we focus on great businesses at attractive valuations. We try and identify those companies which are doing something different, who are generating a lot of value, and that value has come through in the form of company fundamentals which, ultimately, then gets recognized by the market leading to higher share prices over time.

But when there’s a lot of noise in the market to do with macro issues, people don’t tend to focus so much on the company fundamentals and some of that alpha generating, that value generating, goes unrecognized.

But as the stock pickers, we mustn’t get downhearted about that because this can happen from time to time. It doesn’t always necessarily happen in a straight line. And one of the things that we do know is that in the real world, life carries on. Right? Consumers still consume; suppliers are still supplying. That value is being created. It’s just going unrecognized until eventually it gets to such a size that it really does command attention. So there may very well be a snapback, there may very well be a period of stronger alpha generation down the road to acknowledge that true underlying alpha.

And in the meantime, for investors like ourselves, again, exciting times because this disruption in the market is creating an awful lot of opportunities. There are some great businesses out there with valuations that, up until now, have not necessarily, we’ve felt, made an awful lot of sense, even though we a lot of admiration for the business model. So, going and having a look through the rubble of the market of this volatility, seeing what is now great businesses which may now be on sale, will be something that we’re paying a lot of attention to over the next few weeks or so.

I hope that’s been of interest, and I look forward to catching up with you again soon.