The war in Ukraine has increased uncertainty, triggering understandable anxiety across markets. This, in turn, has caused widespread declines, compounding those registered since the beginning of the year with the central banks’ shift in monetary policy to curb persistent inflation. This compression of multiples has not been uniform, affecting European markets more than those in the US, where certain cyclical sectors have fared better.
Added to the psychological effect of a war in Europe is the actual impact it will have on energy and agriculture costs for all economies. There is a supply shock, keenly focused on the industrial sector, which has to do with tempering the recovery of the world economies after the pandemic. The effect of cost inflation on companies and the economy overall depends to a large extent on how quickly markets normalise, predictably requiring many companies in the manufacturing and industrial sector to review their guidances for the year. The war also boosts uncertainty with regard to the course of monetary policy in the medium term, where changes strongly affect multiples.
Given our management style of investing exclusively in the best businesses, our portfolios have minimal exposure to shifts in the economic cycle or sudden variations in exogenous factors, like oil prices, for example. The industrial sector holds little weight in our funds, which consist of quality, profitable companies that dominate their respective markets and, consequently, have the tools necessary to absorb these types of events in their operating accounts. Thus, despite the fact that the crisis in Ukraine may signify downward revisions for economic growth in 2022, particularly with regard to profit growth in the industrial sector, its impact on the portfolios overall is minimal.
One standout among industrial companies is Air Liquide, which we have in the EDM Strategy fund, given its pricing-power and ability to offset inflationary tension and transfer increased energy costs to its customers. Price growth in Q4 reached +7%. In 2021, energy costs were 2Bn EUR higher than in 2020; this increase is half of the company’s EBIT, which demonstrates its capacity to pass on costs.
Although we are experiencing a moment of tremendous market volatility due to heightened uncertainty, this does not imply any deterioration in the solvency of company equity, nor any alteration in our investment approach. Rather, it is an opportunity to buy top quality businesses at very attractive discounts vis-à-vis their fair values.
