The last two years have been hard. A pandemic, social and political unrest, cultural upheaval, were all difficult to navigate. Yet the stock market endured, even thrived. It was a relief in the midst of a tumultuous present and uncertain future. But that strong performance was, in many ways, bought by borrowed money. Or not even borrowed money, more like money conjured up out of nothing or, more specifically, by keystroke entry into a computer that ricocheted from central bank to personal bank account to store cash register (or the 2022 equivalent). Whether this was right or wrong, or should have stopped sooner, is now beside the point. What is important is the realization that economic balance now requires that all that money be accounted for and paid back, either through taxes or more borrowing or, most likely, by higher interest rates and higher inflation, leading to lower economic growth and/or a lower standard of living. Put plainly, we borrowed from the future to help get through the present in the first terrifying months of COVID and beyond. It is now time to pay back that debt. Paying back borrowed money is not always pleasant and neither is the 2022 stock market thus far. In good weeks it is a roller coaster and in bad weeks it's a slog. Certain patterns are developing, however, with energy and materials stocks being driven higher by inflation and the war in Ukraine, tech stocks largely being pushed lower by higher interest rates driving down the value of promised future earnings (especially in companies without much of the way in current earnings) and with other economically sensitive stocks also under pressure by the observation that higher interest rates may slow the economy later this year. It is a toxic brew for investors but not one without hope of generating wealth going forward. What is required is a clear-eyed analysis of where true business value lies mixed with a flexibility as to the likely business winners and losers as events unfold, all without making investment decisions swayed by the latest headlines or day to day emotions. Value is the key. Not just value as in what is something worth. But what will people (and businesses and governments) value over the coming years? Answering what the world will value then helps decide how financial markets and other investors will place financial values on businesses and industries.
As an example, we can start with what all people must value, having an affordable supply of food. That unfortunately is not such a given today in many places. This will likely lead to resources being spent on making more food which will in turn help farmers and their equipment suppliers such as tractor makers and fertilizer producers. Healthcare is another must have service that leads to investment ideas. Another thing increasingly valued is transportation and logistics, helping the prospects of companies in these industries. Once you move past life and death necessities, you get into the speed and security of financial transactions, as well as the steady appetite for entertainment and media. These are just a few examples, but the approach is becoming clear, investing based on finding value needs to have at its core a view as to what people value in their lives, from food and shelter to entertainment and travel.
We are undoubtedly in an investment climate where capital should flow to businesses and industries efficiently supplying goods and services that people need now as opposed to future promises of future breakthroughs leading to future cash. That time has passed. The good thing about being a long-term rational investor is that stock markets in times of stress and crisis discard great companies at just the wrong time more often than investors discard the wrong companies at the right time.
The world's financial structure is a highly complicated system in many ways. Before entering that system as an investor, you need to, first, have enough cash to ride out periods of instability and decline, but next you need to be able to assess where your hard-earned capital should be deployed so it is in places that not only treat investors fairly but also places your wealth in businesses that will be worth far more in the future based on current assessments of their prospects, assets and systems. At Arrival Capital, we endeavor to be your partner in getting capital to where it will be rewarded. We do this by never losing touch with where capital is needed in creating a better economy for the world's people.
Happy Passover to all who celebrate.
