The economic response by policy makers in first world countries to the coronavirus pandemic has been both swift and of an unprecedented scale. This has enabled them to limit the damage to the global economy and manufacture one of the fastest economic recoveries in decades.
The speed of the bounce-back can largely be attributed to: 1) the rapid rollout of vaccines; 2) ultra-accommodative monetary policy; and, 3) unprecedented fiscal stimulus, which amounted to almost 20% of global GDP in 2020 and 2021.
Throughout the economic cycle, Marriott’s preference is to invest in high-quality, dividend-paying companies whose strong balance sheets, market leadership, brand strength and pricing power enable them to produce more reliable dividend growth for investors.
During 2021, it was the pricing power of these companies in particular that helped our equity-based portfolios produce double-digit returns as well as above-average income yields.
Looking ahead, while the actions of central banks and policy makers was initially effective, it has created three major challenges over the short to medium term:
The major downside of the recent unparalleled monetary and fiscal stimulus is that consumer demand bounced back faster than supply, triggering bottlenecks and pricing pressures that would normally emerge far later in the economic cycle. This rapid increase in inflation is piling pressure onto central banks to hike rates and is particularly evident in the US and UK where inflation is at its highest level in three decades.
2. Rate rises in an indebted world.
In response to the surge in inflation the bond market is now pricing in the first US interest rate hike in March 2022, and a succession of further rate increases over the next 2 years. The chart highlights how global debt surged to historic highs during the pandemic. Considering the huge amount of debt globally, we are likely to see significant downward pressures on growth as interest rates rise.
3. Uneven global recovery.
The stark contrast in vaccination levels and quantum of economic stimulus deployed between developed and emerging economies is staggering. For example, approximately 75% of the global stimulus was carried out by the G-7 member countries alone. Unsurprisingly, the recovery within these seven countries has been far more robust than is the case globally. This unevenness will act as a drag on global growth in the years ahead.
As a result of the three factors discussed above, market conditions are likely to become even more challenging in the years ahead as interest rates rise and the economic recovery begins to slow. While these conditions persist, investing in the highest quality companies, such as Johnson & Johnson will continue to serve investors well.
As you can see from the graph, Johnson & Johnson has been able to continue to grow their dividend payments to investors throughout a range of global macroeconomic challenges. Their market leadership, balance sheet strength and ability to maintain profit margins have been integral to their success and positions them well for the challenges ahead.
These characteristics are a key component of the companies within Marriott’s international portfolios and, looking ahead to 2022 and beyond, we are optimistic that our selected equities emphasising quality, resilience and dividends will continue to serve investors well.