In the first episode of Allspring’s 2023 outlook series, Ann Miletti, chief diversity officer and head of Active Equity, and Bryant VanCronkhite, managing director, senior portfolio manager, and co-team leader of Allspring’s Special Global Equity team at Allspring Global Investments, recap a volatile 2022 for equity markets, share their outlook for the new year, and discuss why they believe Allspring’s investment teams are well positioned for 2023.
Bryant VanCronkhite: Although I think we’re going to see volatility, I don’t think the Fed’s (Federal Reserve) going to pivot. What I do think you’ll see is this divide begin to happen between the haves and have nots, if you will. The quality businesses versus the low quality, the cash flow versus the no cash flow, the underleveraged balance sheet versus the overleveraged balance sheet. And that, to me, is a great set up for active management.
Ann Miletti: That’s Bryant VanCronkhite, managing director, senior portfolio manager, and co-team leader of Allspring’s Special Global Equity team. I’m Ann Miletti, chief diversity officer and head of Active Equity at Allspring Global Investments, and you’re listening to On the Trading Desk®. Today, Bryant and I will be recapping a volatile 2022 for equity markets, sharing our outlook for the upcoming year, and discussing why we believe Allspring’s investment teams are well positioned for 2023. So, Bryant, as we were talking before about the volatility in 2022 before we look at the outlook for 2023, what do you think will be different? Do you think the volatility continues or do you think we lose some of the volatility in 2023?
Bryant: The 2022 volatility was there for several reasons, but the biggest reason in my mind was the ongoing paradigm shift in Fed or monetary policy. For a long time, the Fed was able to be the savior for the markets, savior for the economy, largely because they only needed to focus on the full employment or maximum economic output component of their mandate because deflationary forces were just ripping through the economy for the better part of 30 years, allowing them just a singular focus. And as inflation came in post-the Russia-Ukraine war, post-all the stimulus we saw after the pandemic, the narrative changed. The Fed now had to refocus their efforts on inflation and it limits their ability to be this savior for the economy, savior for the markets. And I think the market participants are grappling with that. There’s always this tug of war of something going on. Right now, the tug of war is around what’s the Fed’s role in our markets and in our economy and what can they do and when will they do it? And so, the markets go up on this hope of a Fed pivot and they fall when the realization the Fed’s going to stay hawkish and they do it again and again and again and the volatility continued. I think it’s good for active managers when they have that. But unfortunately, I think it can be emotionally taxing for investors. And unfortunately, I think it’s going to continue into 2023. We’re going to move from talking about inflation to talking about jobs, unemployment, and what impact that has on inflation and deflation. So that’s what we’re going and as we digest that, volatility is likely to continue into 2023.
Ann: Yeah, I think so, too. Do you expect the Fed to make that pivot? It certainly feels like that’s somewhat priced into the market a little bit. When we listen to the news media every day, we hear talk of at least the Fed pulling back, maybe stopping, some even saying that the Fed will cut rates in 2023. What are your expectations for that?
Bryant: So, my view on that is that the Fed and the world have been treating the symptom. The symptom has been inflation. I think the real disease is the lack of qualified workers to fill the number of jobs we have available. And as a result, the Fed will focus on unemployment, focus on wage growth. And what I’m seeing right now does not give me a ton of confidence that they’re going to get that under control in the early part of 2023. And as a result, I think they’re going to keep tapping on the brakes for longer than the market’s currently pricing in. And as that happens, it will put pressure on the broader markets in general. Now, the good news, in my mind, especially for active investors, is that the companies that populate a good portion of these passive indices are the ones that needed the help the most the last 10, 15 years. The companies with limited cash flow, overleveraged balance sheets, lack of competitive advantages, those companies, they needed that benefit and they got an asset lift from the Fed’s helpful ways along the way. That’s not there anymore. And so, although I think we’re going to see volatility, I don’t think the Fed’s going to pivot. What I do think you’ll see is this divide begin to happen between the haves and have nots, if you will. The quality businesses versus the low quality, the cash flow versus the no cash flow, the underleveraged balance sheet versus the overleveraged balance sheet. And that, to me, is a great set up for active management. We love volatility and we love differentiators between quality and low quality.
Ann: I think it’s such an interesting dynamic that you point out because the playing field is somewhat not controlled by management teams. They can’t control anything that happens externally, but they can control what happens internally. And now they have the ability to really show their own strength if the external conditions do weaken and if they’re not supported by the Fed, if that fuel is not coming like it has in the past. And so, I think your point is really, really interesting that all companies won’t be created equal and it really will take stock pickers to pick the right stocks to win in 2023. I think you’re right about that.
Bryant: And what companies need to focus on is changing, right? We have all these new imperatives of a successful business in the future. The whole idea of onshoring or friend-shoring or reshoring, that’s going to be inflation. It’s going to cost money in the short run, right? We need to think about how are we going to secure materials and chemicals and basic needs, including energy for manufacturing processes. And how do you do that in a way that fits the needs around the environmental concerns of society now, but also doing it in a price conscious way? Automation to offset labor issues. These are all elements of success in the future that require money today. And if you don’t have the cash flow, you don’t have the balance sheet, you can’t make those investments. And so even there’s a gap today, that gap in company quality is going to continue to spread over time. And so, yes, it is a great stock picker’s market going forward.
Ann: Yeah, I think it’s critical because a lot of times people focus on the balance sheet today and whether or not there’s enough cash for today. But I know your process and a lot of the investment processes focus on cash flow and free cash and what that can do not just for today but for the future. So, another important point you make.
Bryant: Yeah. One of the things that we focus on the Special Global Equity team’s process is that really the only thing a management team controls through a cycle is how they choose to spend their capital. If you do it well and you make the investments in organic growth initiatives or acquisitions or buying back your stock at the right time, those choices with your capital drive shareholder value and they compound value over time, if you do it well. If you do it poorly, it destroys value. But that’s really what you control. You’re always reacting to different elements in the broader economy and the marketplace. And if you lack balance sheet flexibility, you don’t have control anymore. And you didn’t need the control when the Fed was there supporting you all the time. But when the Fed’s not supporting you, you need that control. And it’s a very small subset of companies in the world that we think can do that. And luckily, whether it’s Special Global Equity team or all the Allspring active managers, there’s definitely a quality bias. And most of those portfolios are populated with companies that look like what I’m talking about with the great balance sheets and good cash flow.
Ann: Yeah, I do think that’s a really important point to make. What I see across all of our equity teams is the focus on quality, especially at times of change. And one of the things that was probably frustrating to investors in 2022 is you had the collapse across the board. So, we saw the rise, as you talked about earlier, in 2021 of everything. And then we saw the decline of everything in 2022. But now if you’re going to have the separation, even if the broader market doesn’t do well in 2023, you can still have individual stocks do well, particularly if they’re quality companies.
Bryant: That’s absolutely correct. And I think one of the things that makes us successful Allspring through a cycle is the ability to build intelligent portfolios. And what I mean by that is that when we’re building portfolios, we have to focus on stock selection. That’s our core strength here. But a lot of other risks and characteristics enter the portfolio over time, things like your style factors, and your biases against your benchmarks there, or your sector positioning, or your country positioning. Even in a U.S. portfolio, you still have exposure to different countries. Our Investment Analytics team at Allspring does a phenomenal job providing us tools to really dissect the risk profile of our portfolios, allowing us to play to our strengths and to the extent that our strengths are buying companies that have these quality characteristics that control their own destiny, if they’re using their balance sheets wisely, we can isolate our risk around that, helping to give us confidence that the outcomes in the future will be consistent with our expectations that we talk to clients about in the past. So, that’s a great tool that we have here at Allspring and I think it’s a really unique differentiator for us.
Ann: I do too. I think it’s a great way they go about their process to help elevate the teams, but it certainly does help us elevate the discipline across the investment platform, as well. So, thanks so much, Bryant.
Bryant: It’s my pleasure. Thank you.
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