Please find below our Investment Market Update as at 10th December 2021.
Blue Sky Investment Market Update
All matters Omicron
What an eventful week on all matters Omicron. What a week in politics!
I won’t dwell on the politics, but I will pass comment on the likely economic ramifications and the possible impact on investment markets.
As LGT Vestra stated this week, pandemics are, by their nature, disruptive. In the current climate, every extension of the pandemic increases the chances of inflation creeping higher and restrictions being imposed. The Omicron outbreak could either encourage central banks to leave policy settings untouched for longer or to maintain the speed at which they plan to taper quantitative easing and hike interest rates. Markets wise, as I mentioned recently, there are three major focuses at play; inflation, corporate earnings and monetary policy, aside from the virus of course. We will continue to monitor intently.
Last week, just as my update was hitting your inboxes, equity markets went into shock as news broke that Omicron cases were anticipated to spread quickly. Interestingly, with cases multiplying daily, equity markets are enjoying a resurgence! What’s going on?
“At times it feels like a tennis match”
I liked the above comment which I read on Bloomberg.com earlier in the week when describing the ebbs and flows of sentiment. Equity markets don’t like uncertainty of course. The response to the Omicron announcement saw countries slamming shut their borders, investors selling off shares and vaccine manufacturers laying out their plans for new boosters, as many spoke out about the limitations of existing vaccines. The S&P 500 in the US posted its biggest one-day slide since February this year.
Then, a few preliminary reports emerged suggesting that Omicron causes milder effects, and vaccines were likely to shield against severe disease and death. As a result, equity markets responded positively. The reality is that it’s too early to tell the overall impact but expect the tennis match to continue and to boot, cause some volatility.
Our view is that trying to time the markets and respond to such short-term movements is fraught with danger. Naturally, in such times we also reflect on the composition of our portfolios. They held up relatively well, partly because of the speed of the rebound and partly because of the variety of alternative assets we hold.
For example, the Foresight Sustainable Real Estate fund, which is embedded within many of our in-house portfolios, has risen in value by 4.44% in just a few days (Source: FE Analytics, 3.12.21 to 9.12.21, including fund management fees).
Similarly, our new Global Themes portfolio has risen by 3.44% on the very same basis, reinforcing our views of not listening too intently to the news, not generalising, and having conviction about the longer-term trends.
Whilst we haven’t favoured government bonds, we still have some exposure within our portfolios. It was interesting to note that last Friday US Treasuries rose sharply, supporting the traditional premise that they are safe haven assets. This week however, the price of Treasuries fell as sentiment improved and equity prices surged.
UK Interest Rates
Interest rates didn’t rise in November as many expected, but attention is now drawn towards the latest policy decision on 16 December. However, we think it’s unlikely that rates will rise following the latest tightening of restrictions due to the emergence of Omicron.
Bloomberg Economics expect unanimous support for no change with the consensus view being to ‘wait and see’ regarding the data for this new strain before changing policy. Broadly, financial markets see a 40% chance of a hike.
What is the outlook for 2022?
We spoke to Legal & General Investment Management (LGIM) and they pointed to a comment by their Head of Asset Allocation, Emile van den Heiligenberg, who said “Further lockdowns or further measures to limit the contact between individuals are probably necessary. However, the impact on overall stock market earnings from previous lockdowns has been relatively short lived”, he added. “Our bet is that equity investors will look through it.”
In our opinion, the advice is buy on the dips where possible but participation in equity markets makes perfect sense with interest rates being so low and inflation rising. Leaving money languishing in cash is guaranteed to lose you money in real terms!
Have a great weekend.
Gary Neild and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.