The price of many quality businesses has fallen sharply over the past six months. The falls we are experiencing this week are the reality check that inflation and rising interest rates may well be here to stay and are not transitory as many initially believed.

Now is a time for investors to benefit from better valuations and cheaper prices, on the proviso of course that they are investing in companies that have lower debt obligations, sustainable income earnings, good management and an economic moat that protects them from market competition. In this environment, if you are invested in companies that are growing their earnings, then as an investor, you will be doubly rewarded by a growing dividend income stream and share price when the market eventually works out that these companies have been oversold. We should all be a little excited at the prospect of buying assets more cheaply.

From a Future Gen perspective, we have been preparing for this event. We have substantial cash in our client investment portfolios that can be deployed. Further we have progressively de-risked portfolios since July 2021, lowering our clients overall exposure to growth.

To provide some context to these recent falls, the Standard and Poor’s 500 (S&P 500), which tracks the performance of the 500 largest companies listed on the US stock exchanges, is down 21% year to date.

The Nasdaq Composite includes all technology stocks listed in the USA is down circa 30%.

The ASX 200 decline year to date is 12.60%, but masks the more serious declines of even the highest quality companies. Indeed, 112 of the biggest 200 companies listed on the ASX are below their price at the beginning of the year and the average decline is close to 20%.

Zip, a popular Australian technology company is down 88% at the time of writing.  Boral is 54.5% below its price at the beginning of the year. James Hardie a major building provider in the USA is down 46%. Kogan the Australian retailer is down some 66% since the start of the year. And even high-quality company, Reece, is 52% weaker. Meanwhile, Wesfarmers is down 30% for the year.

In summary, there is carnage and there are opportunities to be had.

Of course, all of this is happening because inflation is surprising to the upside, scaring many investors as well as central bankers. In response, the central bankers are reversing the massive stimulus that was foisted on markets and economies in response to COVID-19.

The stimulus “put” that drove massive asset price inflation during the pandemic is being taken away. The US Federal Reserve will put its balance sheet on a new course, reducing its size by up to a trillion US dollars per year.

We are witnessing China’s economic woes, the invasion of Ukraine, supply chain disruptions and the possibility of recessions and stagflation. These times present a rare opportunity for contrarian investors with an investment horizon greater than 5 years.

Remember, as Warren Buffett stated: “Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now.”