The market environment we are entering looks unlike any other we have seen this millennium.
Tighter monetary policy, high single-digit inflation and a fragmented global supply chain have led to an environment that’s become difficult to predict.
Yet while this is a novel environment for most investors, Malcolm Smith, head of international equities at JP Morgan, said there is a small number of veteran fund managers for whom this is nothing new.
Therefore, Trustnet has asked a handful of managers with a track record of more than 20 years how they are using their experience of previous crises to navigate the current volatility.
Carl Stick, manager of the Rathbone Income fund, said that while this cycle is unlike any he has experienced in the past, the closest parallels are with the bursting of the dotcom bubble in 2001.
With most markets in decline, he said that “the fear is that earnings have yet to retrace”, so he is adopting the same approach he took in 2001 and focusing on valuations.
Stick explained: "Twenty years ago, we did two things – we tried to be realistic as to what businesses may earn, but more importantly, we focused on valuations.
“Owning a business at the right price is the best insurance policy as markets fall; conversely, expensive assets offer nowhere to hide if things go awry.”
Anthony Cross, a manager on Liontrust's Economic Advantage Team, also ran money through 2001 and the financial crash of 2008.
He will approach this rotation the same way he did during both these crises, focusing on the pricing power of companies, which he said will be critical in dealing with cost pressures.
Although Cross was “not overtly indicating that a recession was likely”, he said it was something that he was certainly mindful of in today's environment.
He claimed that “cyclical businesses with low barriers to competition, poor pricing power and weaker balance sheets” will be the worst affected in the coming cycle.
Meanwhile, Alec Cutler, manager of the Orbis Global Balanced fund, said many investors appeared to be reluctant to accept the bear market could last for some time yet, meaning growth would remain out of favour for many years to come.
“If the world's changing and everyone is stuck in the last 12 years, they're going to get hammered,” he said.
In his 40 years of investing, Cutler has noticed symmetry in how markets behave. For example, a short and sharp growth cycle is often followed by a short, sharp value cycle.
He added: "One thing to think about is just how long the next environment could last, and if we're looking at any kind of symmetry, it could last a very long time.
"We're considering what kind of investing era we're going into. I prefer to think of it as an era, because when you've had 14 years of something, that's more of an era than an environment."
The last decade was typified by a desire for companies with high returns on invested capital, which is why the likes of Google, Microsoft and Amazon did so well, according to Cutler.
It is also the reason why commodities and energy companies have largely been overlooked.
Cutler added: "The world just wanted no capital investment and cash flow, which is great, but only a few companies can do that.
"That reluctance to invest is a strong signal that we're going to have a very long cycle."
He likened the current environment to the 1970s, when inflation hit double digits and central banks took an aggressive stance on monetary policy.
Cutler compared current valuations with those in the 1970s to see which asset classes were under or overvalued.
Analysts typically compare prices with their 7-10 year history in order to assess how they’re valued, but this becomes irrelevant when the previous decade only covers one cycle.
Many of the findings were as expected, such as the value in commodity stocks, but the manager was also surprised to see defence assets were also a great place to invest.
He said the ongoing war in Ukraine and growing tensions between the US and China would likely result in increased defence spending in the future.
He pointed out that in the 1970s, the average European country was spending 4.5% of GDP on defence spending, which has now lowered to around 1.6%.
The findings mostly emphasised that many of the best performing stocks of the past decade were extremely overvalued.
Cutler said: "People kept saying that things like Netflix were cheap relative to its historical standpoint, but that's because Netflix used to sell at 400 times earnings and dropped to 40 times earnings – that looks cheap, but it ain't cheap."
Tim Guinness, chief investment officer of Guinness Asset Management, agreed that prices became very high over the past 10 years, and said the recent pullback was just an example of the market correcting itself.
He expected this adjustment to end when the S&P 500 lowers to a third of its peak, at 3,200 from its 4,800 high.
Guinness expects this correction to be completed by the end of the year, at which point global markets can begin to recover.
He said, “this is not something I’ve never seen before”, adding it was not as extreme as some commentators have claimed.
The 2001 and 2008 cycles involved the bursting of a stock market bubble and a banking crisis respectively, neither of which are evident in the current rotation.
Guinness added: “We’re not seeing the end of globalisation – we’re just seeing an adjustment.”