Slowing Economic Growth and Inflation...

Slowing Economic Growth and Inflation Dominate Q2 Small Cap Quality Value Outlook

Small Cap Quality Value Review of the Second Quarter of 2022 | KayneCast 195

August 5, 2022

On this episode of KayneCast, Julie Kutasov, Portfolio Manager of the KAR Small Cap Quality Value Strategy, joins host Jordan Greenhouse to discuss the Small Cap Quality Value Portfolio for Q2 2022. They discuss the impact of inflationary pressures and geopolitical events on the portfolio and the broader market heading into the third quarter.


The Q2 2022 Equity Performance Review  

A combination of factors led to high volatility for the market during Q2 2022. Amidst slowing economic growth and fears of a possible recession, some investors shifted back to a focus on quality, with an emphasis on solid balance sheets, earnings stability, strong returns on capital, and sustainable secular growth.

Inflationary pressures drove the outperformance of energy and basic materials companies in Q1, which Kutasov notes is “very different from a traditional economic slowdown where reduced demand typically leads to lower commodity prices — something that we did observe but not until late in the second quarter.” Energy holdings were up nearly 27% for the first half of 2022.

Inflationary concerns were exacerbated by the ongoing Russia-Ukraine war, along with concerns the ongoing conflict will impact energy and food prices. Attempts by the Federal Reserve to combat inflation with aggressive interest rate hikes had some impact, but investors worry the Fed’s impact on inflation is limited.


Q3 2022 Market Outlook for Small Cap Quality Value

Moving on from her Q2 market performance review, Kutasov addresses the Q3 outlook for the Small Cap Quality Value Portfolio. 2022 began with the emergence of the Omicron COVID variant, and the first half of the year saw more infectious sub-variants of Omicron develop. While COVID’s impact on the markets is much reduced from 2020, the resurgence of the virus in China could put pressure on the still-recovering global supply chain.

Geopolitically, the war in Ukraine continues to add uncertainty to the market, resulting in higher gas and food prices. The result puts pressure on the key driver of the US economy – consumer spending.

Despite these concerns, Kutasov believes that KAR’s Small Cap Quality Value portfolio is well-equipped to ride out market pressures because, in her view, KAR’s “companies’ leading market positioning provides them with solid pricing power including the ability to pass through any input costs increases to their customers.”

Listen to the podcast above to learn more about the top contributors and detractors in KAR’s Small Cap Quality Value Portfolio for Q2 2022 and join us in Q3 for another market performance review.

Learn more about the Kayne Anderson Rudnick Small Cap Quality Value Portfolio today.

This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein.

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