Attractively-valued quality companies have tended to face a headwind since Autumn 2021. In terms of time horizon and regions, the headwind was relatively uniform, which confirms the idea of a widespread pressure on the investment style, focused on attractively-valued quality companies. Moreover, this headwind has been felt not only by the HQAM Quality portfolios, but basically by all the Quality peers identified by HQAM.

The market environment has changed since Autumn 2021, as central banks are looking for a way out of their ultra-expansionist monetary policies, inflation has skyrocketed globally, as well as demand in the post-COVID era has caused disruptions to supply chains. Security tensions resulting from Russia invasion in Ukraine only aggravate the situation. All these challenges pose a threat to global prospects for growth. In the past, Quality portfolios offered a safe haven in such uncertain market environment. However, in the past, this behaviour only kicked in during a post-shock recovery, when the markets can make a rational reassessment of the environment. Experience shows that how long it takes this adjustment to the new market environment to actually kick in is not something one can predict: for example, during the financial crisis, it was 1 year, yet only 2 months during the COVID crisis. The adjustment is also always associated with high volatility.

With the following analysis, Hérens Quality Asset Management (HQAM) would like to demonstrate that there is still a good climate for Quality equity.To do this, we discuss three reasons that show why now is a favourable and economically reasonable time to get into Quality. We also discuss that despite currently disappointing short-term results, especially since the early 2022, today is a bad time to get out of Quality.

The business aspect shows that when compared to index securities, Quality delivers much better business performance. The wide differences between quality companies and non-quality companies are demonstrated from a business point of view. We show the sectors that have low and high business quality, the reasons for it, and what an investor should keep in mind.
The valuation aspect shows that quality equity is very attractive in the long-term comparisons, and, given the underlying business quality and growth prospects of these companies, the price that one must pay for them now offers an attractive initial investment opportunity.
The market environment aspect, i.e., the foreseeable circumstances related to the interest rates that no longer fluctuate around zero, that are above and not below the target levels set by central banks, to the sluggish economic growth, speaks clearly in support of attractively-valued quality companies. They are price-setters, not price-takers, and thanks to their competitive position, they can pass the rising production costs along. Additionally, thanks to their low capital intensity and low indebtedness, quality companies are little affected by borrowing costs. Quality companies also enjoy proven business models that can deliver above-average growth in a generally sluggish economy.