Melda Mergen, global head of equities, said companies felt two major impacts of the inflation and interest rate increases in 2022. The first impact was the suppression of valuations, as current cash flows are more valuable than future cash flows in this environment.
The second impact was on a company’s business model, where questions arise as to whether a company can sell as much as it did before, customers can continue to buy, and margins can be maintained in the face of an increased cost of doing business, she said.
“Even if the interest rates stop rising, they will be much higher than what we’ve experienced recently,” Mergen said. “That gets translated into really looking at each company and individual sectors’ ability to navigate through this time period.”
Columbia Threadneedle’s earnings estimates for 2023 are that the U.S. will be more resilient than the rest of the world, coming in at around its historical average despite slowing GDP and a possible recession, she said. But with P/E ratios remaining high, value stocks remain preferred over growth stocks.
“This doesn’t mean we shouldn’t invest in growth companies, there are still a lot of sector trends that carrying over and will create a lot of opportunity for the growth companies to continue to deliver earnings and returns for our clients,” Mergen said. “But it’s not as easy as it used to be.”