Welcome to Soundbites, weekly insights on market trends and investment strategies brought to you by Investment Executive, and powered by Canada Life.

For today’s Soundbites, we talk about volatility in global equities with Kent Chan, equity investment director for Capital Group’s global equity fund. We talked about what volatility says about the health of markets, where he sees opportunities, and how global investing is changing. But we started by asking if volatility will persist through 2022.

Kent Chan (KC): We do expect the volatility to continue through the year, as there’s just so many unknowns. How bad will inflation become? Is it transient and what does that mean? And what’s that going to mean with regards to what the Federal Reserve and central banks around the world decide to do. We just don’t know. In addition to that, there are clearly geo-political risks. And that just adds to the uncertainty which leads to the volatility in markets. So, yeah, we do expect the volatility to persist through the remainder of the year.

Putting the recent volatility into perspective.

KC: If we reflect back on how well risk assets have done over the last couple of years, one feels kind of spoiled. Ironically, I would argue that during that period of calm, as equities were persistently rising, our investment managers were increasingly stressed. There needs to be balance. And when that eventual calm shifted, it felt very acute, as if everyone decided to wake up and sell at the same time. But what’s happening right now creates opportunities for positioning clients’ assets for the medium to long term.

What sectors he’s watching.

KC: We definitely have views with regards to sectors that have a long growth trajectory — definitely the digital economy. The kind of picks and shovels supplier to everyone are semiconductors and chips. Everything is becoming smart. Our cars are becoming smart. Our refrigerators and washers are becoming smart. And that’s what’s really driving the digital economy. And then there is the innovation around healthcare. Healthcare has, oddly enough, had a tough time post the discovery of the vaccines for Covid. But the recent underperformance of the healthcare sector is creating opportunities. And maybe the final one is there’s been a significant underinvestment in some of the capital equipment for heavier industries and, as we get out of Covid, there is significant opportunities that we may see tightness, just like we’re seeing in semiconductors today, in many of the kind of heavy capital-intensive industries just because there’s been an underinvestment. So, it comes down to the opportunities one at a time.

Is volatility a good thing?

KC: Well, I would say volatility’s always stressful so I wouldn’t necessarily say it’s good. But, unfortunately, I would say it’s normal. And the lack of volatility is unusual and should not be expected to persist. Nothing goes up in a straight line. But, also, nothing goes down in straight line. You want volatility to create opportunities. Volatility is part of a rising share price. A sharp rise in share prices creates opportunities to make profits or take a gain. If you’re prepared with the fundamental analysis, and you know which companies will be able to handle the volatility, then you know which companies you’d want to invest in on the way down.

The potential value of inflation.

KC: The steady period of gradual price increases, which in many cases had to be statistically unsustainable, well, now you’re getting the return. It’s just happening more sharply and in a more compressed time. I’ll turn it around another way. You know, we should thank our lucky stars for inflation. Because that proves that the system isn’t broken. The fact that we’ve printed a lot of money in the United States and the developed West, if there wasn’t inflation, that should worry you.

And, finally, the bottom line on global volatility.

KC: No one likes volatility and change is uncomfortable but it’s normal. And in this environment, don’t panic. It’s important that everyone knows what they own. Whether you’re an advisor you need to know what’s in the portfolio on behalf of your clients and where we used to be able to think about investing on a regional or local basis, that world is gone. It’s going to be the best companies in the world, and you want to get in front of, get invested in, and also hold onto those best companies.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Kent Chan of Capital Group.

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