There has been almost no place to hide thus far in 2022 as volatility spiked and markets sold off in the face of a multitude of threats.
With inflation at multi-decade highs, it remains to be seen whether policymakers can achieve a “soft landing” for the economy or if a recession is the more likely outcome.
First Eagle seeks to leverage the price dislocations that often accompany volatility to identify attractive entry points into businesses we view as resilient, including those we believe have the potential to mitigate the impacts of inflation on portfolio returns.
- While current market dynamics can be trying, strategies that attempt to mitigate the impact of down markets while participating in their upside may provide a more favorable outcome for investors, encouraging them to stay invested and providing the opportunity to compound gains over the long term.
Nearly all asset classes, sectors and geographies saw broad declines. Market volatility was elevated, and with the conditions that inspired it seemingly unlikely to abate soon, this may be the norm. That said, we do not view the short-term waxing and waning of portfolio values as the most serious risk facing investors; instead, we believe the possible permanent impairment of capital in real terms represents the most significant obstacle to long-term outcomes.
We seek to mitigate this risk and generate long-term absolute returns across market cycles through a selective, valuation-sensitive approach to equities, in many cases complemented by cash and cash equivalents as a form of deferred purchasing power and gold and gold-related securities as an important source of ballast. We look for companies we believe have the potential for persistent earnings by virtue of possessing a scarce, durable asset—a tangible or intangible factor that in our view provides it with a long-term operational advantage and is highly difficult for other businesses to replicate. We purchase these businesses only when available at a “margin of safety,” or discount to our estimate of their “intrinsic value,” a pursuit often facilitated by market volatility and the price distortions that may result. The end result is an eclectic mix of assets we believe has the potential to mitigate inflation’s impact on real returns in the face of tumultuous markets.
Nowhere to Hide from Volatility
Markets, already on edge from incessant inflationary pressures and the aggressive policy tightening it was expected to inspire, were rattled further by new worries in early 2022, as Russia’s invasion of Ukraine and a new round of Covid lockdowns in China had unwelcome implications for both global supply and demand. There has been almost no place to hide thus far in 2022; commodities were among the only assets to generate positive returns for the year to date through the middle of May.
Implied volatility across asset classes, which had been creeping higher since the fall, spiked in response to Russia’s attack on Ukraine and has been biased higher since. Notably, fixed income volatility—as reflected by the ICE BofAML MOVE Index— approached highs not seen since the tumult of the March 2020 Covid-19 risk selloff.
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