Clearly, we’ve seen a very long period of equity markets rising, and there’s a lot of uncertainty. There are a lot of events that can continue to unsettle the investors in the market and will drive equities on a day-to-day basis. But I think it’s important to look longer term than that and really think about the fundamentals of what we’re investing in.

In the near to medium term, any number of factors are going to impact equity markets, whether it’s macroeconomic factors, rate rises, inflation, the recovery from the pandemic or other news flow—for example, the issues we’ve heard about in China. But let’s be honest, we don’t always have an edge in calling those issues. There’s a debate about whether China is an investable market. We still fundamentally believe it is. But again, it’s about understanding the dynamics in individual sectors and individual companies to find opportunities to invest. And on the one hand, while we’re seeing a regulatory crackdown in a number of industries like technology and education, the regulatory imperative around climate is also creating a huge amount of opportunity, and that’s an area we’re actively researching and looking to invest in.

The fundamental research that we’re undertaking is really focused on trying to develop conviction around both return expectations and risks that are present in any company that we may invest in. We do that through building very detailed models of the companies to engage with the company management, as well as their competitors to really understand the ecosystem and environment that each of those companies is operating in. And a key component of building that conviction is a thorough analysis of the E,S, and the G issues for each company and the industries that we research. Investing around the climate issue is not just about understanding who’s impacted today, but to try and understand how does this evolve from here? Where there are companies that are innovating? Where are there companies that are providing the infrastructure to meet the climate commitments the various governments around the world have made? And then thinking through the some of the second- and third-order effects of how things change.

Of course, inflation is a top-of-mind issue for many investors, but again, is that a topic that we’re likely to have much of an edge in calling? What’s more important is to understand the impact of different inflationary scenarios on the individual companies that we invest in. So it’s really digging in and trying to understand where is their pricing power, which companies will be able to pass on inflation and maintain their margins, and where will you see pricing pressure margins contracting? And it’s really that level of analysis that we have an edge in being able to do and can construct better portfolios as a result. I think for any particular macroeconomic issue, as you look across the universe of stocks you can invest in, the sensitivity to those issues is going to vary across that universe. And the trick is to construct a portfolio that is not going to be overly influenced by any one individual macroeconomic factor. The trick, though, is then to think about what beyond those macro factors drives the underlying performance of the stocks, and that’s really where we believe we can have an edge.

Chris Hogbin is Head of Equities at AllianceBernstein (AB).

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 and are subject to revision over time.

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