If the past couple of years has taught us anything, it is that trying to anticipate events in the macroeconomic environment is a high-risk strategy. 
Who could have predicted Covid, war in Ukraine, double-digit inflation or the market reaction to the surprise mini-Budget? And, if we could, how many of us would have made the right investment decisions to mitigate risk and capture opportunities ¬– or timed them correctly?
If you are building a portfolio as a long-term equity investor, in our view, you need to have a balance of companies that can flourish in different economic environments. This in itself brings a risk, which we will come to shortly.
But first, to illustrate the point, let us consider a few scenarios and the companies we have bought that we think will deal with them best.
Soft landing
In this scenario we should see the companies most exposed to the retail and consumer discretionary market bounce back strongly. Holdings we have here include JD Sports, Next and pub group Young and Co’s Brewery.
Consumers are feeling the strain, updates in the past month from these and similar companies have a heavy bias towards disappointment, and share prices have been pummeled. JD Sports has seen its share price halve this year. Similarly, Barratt Developments – also down over 50% YTD – and other housebuilders might see an upturn in fortunes if interest rates plateau or retreat.
This is a market thirsty for good news. You can see that in the price volatility – higher than anticipated inflation numbers or a government U-turn can send share prices jumping sharply one way or another. The market is on the sidelines, waiting for the right moment to buy – and when it comes many of these beaten-up shares could lift a long way quickly.
Hard landing
Gold miners have struggled this year as interest rates have risen, but if those rate rises and/or missteps by the government tip us into deep recession then this is the kind of environment in which gold tends to do quite well. At the point the hard landing materialises the market will be breathlessly anticipating the monetary easing that is going to have to come. We hold Barrick and Newmont.
A number of other defensive holdings might do well as a hard landing unfolds. Here the utilities, like National Grid and SSE, look attractive. Another big position for us is scientific, technical and medical information and analytics company RELX. With revenues spread across four divisions in multiple geographies, it has multiple drivers that can perform across cycles leaving it relatively immune to a bad downturn.
Lost nerve scenario
A third scenario is that the government and central bankers lose their nerve. The inflation target is lifted, and the Bank of England backs away from interest rate hikes. Here we have to learn to live with permanently higher inflation
In this scenario the gold miners and the utilities again look strong, but other stocks might surprise. Whitbread is one company we think can pass on costs without impacting demand or occupancy. Look for companies with strong brands in positions of strength.
Picking winners
The advantage of holding a portfolio for all seasons is that you are less likely to be wrong – you have a number of horses in the race. The risk is that your successes simply offset your failures and you flatline.
Good stock selection should remedy this problem over the long term. Simply put: the best-of-breed companies within these sectors should outperform their peers in all scenarios. Over the short term you might see negative sentiment swamp share prices, taking good companies down further than they merit, but for us this represents an opportunity to add to some positions. The best companies cope best with macroeconomic challenges.
An illustration of this is retailer Next. Year to date its share price is down 37%, but over 10 years it has delivered a 338% return. A rival that was in the FTSE 100 a decade ago has lost over 50% in the same period.
Next has survived Brexit and Covid, and I am confident it will survive the current pressures on disposable income. Many of its competitors have fallen by the wayside in this period, so it has benefited from being one of the fittest survivors.
Picking winners – companies with the best management teams, the best capital allocation policies and strong balance sheets – pays over the long term.
James Goldstone is co-manager of the Invesco Select Trust UK Equity Shares Portfolio. The views expressed above should not be taken as investment advice.