Chris Hogbin:

Few investors would’ve anticipated the very strong returns we’ve seen, particularly in the US market. Although we’ve had a number of surprises, whether that’s inflation, supply-chain disruptions or, more recently, the reemergence of a new variant in the pandemic. What we have seen throughout the year is strong economic growth and very strong earnings growth across a number of companies in the portfolios we invest in. We still expect good earnings growth, more moderate than the levels we’ve seen in 2021, but that should set us up for a market that can continue to progress from here.

When we have situations like supply-chain bottlenecks, when we have loose monetary policy, it can be easy to be fooled into thinking that companies are earning a normalized rate of return, but actually they’re benefiting from those extreme conditions. So the key, as we analyze individual companies and industries, is to really understand what is the normal earnings trajectory of those firms and look through some of these temporary effects that we’ve seen in the last year. And really forecast out what’s going to happen to those companies over three to five years from now, once a lot of these risks or uncertainties have been resolved. What we have seen though is that the US market has performed incredibly strongly. It is important to sort of diversify, particularly given how concentrated the market has become both here in the US, but also other markets around the world. In China, we’ve had a market that, like the US, was very concentrated around a small number of technology names and then performed very poorly in 2021; that creates an opportunity to identify stocks to invest in.

In Europe, we would expect a continued cyclical recovery. We think the valuations look more attractive, but again, it will come down to individual companies and industries that we want to invest in. Responsible investing continues to gain increasing mindshare with investors around the world. There are two sides to that: One is looking through the ESG lenses to identify risks in a portfolio. The second is to look through the same lenses to identify opportunities in a portfolio. When we’re looking at ESG issues, we don’t just want to talk about them, we actually want to gain insight around what’s really happening.

To help facilitate that, for example, around climate, two years ago we set up a research collaboration agreement with Columbia’s Earth Sciences Institute, where each of our investment teams is able to partner with academics at Columbia to investigate particular issues that are relevant to their research agenda around industries and companies that are relevant to their own portfolios. There are a number of themes that are going to shape the future, and our analysts spend a lot of time investigating them. A good example would be synthetic biology. That’s a cutting-edge technology where, actually, we can engage not just with companies involved in the industry, but scientists involved in it, regulators, et cetera, to try and understand the trajectory of growth in the industry, and then drill down and say which companies can be exposed to that, that make potentially attractive investments.

As an active manager, we believe that fundamentals will drive stock prices over the medium to longer term. So it’s important that we research industries and companies to find companies that can deliver quality, consistent earnings growth over many, many years. It’s important to avoid situations where companies are over-earning, whether that’s because of supply-chain bottlenecks—for example, retailers are not having to discount as much this year as they have in the past—or, in financials, because we’ve got very accommodative monetary policy and really haven’t seen a credit cycle, and we don’t want to get fooled into thinking that companies that are earning a high margin today can be able to deliver that over time. So it’s avoiding companies like that, and looking for those companies that can really deliver quality, consistent earnings over time.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.

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