The first eight months of the year have seen the continuation of the most aggressive and synchronised central bank hiking cycle in half a century. The US Federal Reserve rate was recently increased to 5.50% – its highest rate in over two decades – and many other central banks, including the European Central Bank and the Bank of England, have also moved interest rates firmly into restrictive territory. When viewed in conjunction with elevated services inflation, which has proved stickier than many initially envisaged, a challenging economic environment appears certain to continue as we move towards the end of 2023.
There remains significant debate as to whether we will simply see a period of muted global growth, or whether the global economy will tip into an official recession – the inversion of the US Treasury yield curve, which reached its deepest inversion since 1981 during July, suggests that the latter is more likely. An inverted yield curve is typically a precursor to a recession and occurs when yields on shorter-dated bonds rise above those for longer term ones, reflecting an expectation that the central bank will need to cut rates to boost an economy hurt by higher borrowing costs.
During recessionary periods, Dividend Aristocrats have historically been the standout performers for equity investors, aided by their ability to reliably grow their earnings and dividends irrespective of the prevailing macroeconomic conditions, as evidenced by the track record of Procter & Gamble below.
This ability has been particularly evident over the past three and a half years since the onset of the global pandemic. During this time the company showcased:
- Ample liquidity and strong cash flows (brought about by resilient demand) to navigate the initial lockdown period.
- Robust and reliable supply chains to navigate the disruptions in global trade and shipping.
- Market leadership, brand loyalty, and the resulting pricing power to overcome the inflationary pressures and maintain excellent operating margins.
- Geographic diversification to minimise the impact of revenue disruption in any one country.
- A strong and well managed balance sheet to mitigate the impact of the current interest rate hiking cycle.
These attributes enabled P&G to continue to grow its dividends despite the global turmoil. Indeed they have also produced sufficient operating profits to repurchase a staggering $21 billion of shares in the past 2 years. These attributes enabled P&G to survive, and indeed thrive, during the unique challenges brought about by COVID-19 but also ideally equip them to continue to produce reliable outcomes for investors going forward.
Marriott’s international equity portfolios are comprised of many such companies. These best-in-class market leading businesses possess the brand loyalty, pricing power and balance sheet strength to continue to reliably grow earnings and dividends over time - positioning our portfolios to deliver more predictable investment outcomes for investors, irrespective of the extent of the economic challenges which lie ahead.