The Quality Spectrum: Stability in an Unstable World

Executive Summary

War, inflation, rising rates, banking chaos, and recession are among the challenges facing markets. Investors must balance these shorter-term risks with the long-term return prospects of equities. Quality stocks have both outperformed over the long haul and protected during market drawdowns, making them uniquely suited for this type of environment. For investors interested in even more downside protection, we’ve launched a long/short strategy that exploits the stability of attractively valued high-quality stocks and the instability of expensive low-quality stocks.


The current investment environment is fraught with peril. Geopolitical instability and domestic political conflict form the backdrop for an economy beset by inflation, rising rates, a festering banking crisis, and slowing growth. Most economists expect a recession, though timing, severity, and length are unknowns. Yet, valuations remain rich for many asset classes.

In such an environment, investors must consider how best to pursue the long-term returns of equity markets given these shorter-term risks. At GMO, we have a long history of Quality investing and view this as the type of environment in which Quality companies not only survive but typically strengthen their business models for the long term. In this letter, we extol the virtues of Quality while warning of some implementation pitfalls. In addition, we discuss our relatively new long/short Quality strategy, which we expect to provide even more downside protection than long-only Quality while still delivering strong returns. This long/short implementation may prove particularly valuable in the environment that lies ahead.