Please find below our Investment Market Update as at 14th April 2022.
A short one for a short week
..and I’m not talking about myself!
I had intended to provide you with our quarterly investment update this week, but time is not on my side with the Bank Holiday on Friday. Instead, I will provide you with a snapshot into what is happening across markets, a perspective on current dynamics and some further insights into what we expect coming down the tracks.
After a lull last week, we have seen some weakness in market confidence based on increased pessimism around the likelihood of successful peace talks. The Pentagon announced yesterday that the war would “now enter a more protracted and very bloody phase” as Russian forces re-energise in the East of Ukraine.
Add into the mix the fears over rising inflation and hikes in interest rates, it’s no wonder there is uncertainty dominating markets.
Will there be a housing slump?
We are certainly thinking there will be weakness in the housing market. Remember, the figures about a booming market are backward looking. What interests us most is what is going to happen moving forward?
Confidence has been sky-high but with interest rates rising they will likely create a drag on sentiment. Granted, the scarcity of property to buy may well mean prices are elevated for longer, but we also expect banks to begin to reign in some lending.
Restrictions in lending seem likely across the piste. On the corporate side, as reported on FT.com this week, Eurozone banks plan to sharply tighten access to corporate credit in the second quarter as the war in Ukraine weighs on the outlook. The risk tolerance of banks is going to be tested with talks of recessions around the corner too.
US & UK inflation continues to soar
The latest US data states inflation at 8.5% in March, up from 7.9% in February. Accounting for over half the increase was gasoline prices which rose by 18.3% in March.
UK inflation has risen to 7%, again fuel prices being a major reason. The rise is the highest in 30 years and ahead of the 6.7% which economists expected.
So, it’s time to be cautious?
We would argue that it’s time to be prudent. Many cautious assets have not fared well in this environment, mainly because interest rates are rising in response to inflation. Fixed interest instruments like Government bonds are no longer behaving in the traditional way and creating ballast to portfolios. What we have been experiencing is an erosion of capital, just at the time when, traditionally, in times of uncertainty, such instruments would have created safe havens for portfolios. This is no longer the case.
We were talking at our investment meeting on Tuesday this week about new potential clients who we are meeting, who have large pension funds with corporate schemes. They believe they are being prudent by moving them into so-called ‘lifestyle funds’ with their pensions at age 55/60. Normally, this a wise strategy for some but not at the moment. For example, UK indexed linked gilts have lost 8.85% since the invasion of Ukraine and UK gilts are down 4.17% too (up to 11th April 2022, source FE analytics). These assets are in many cases behaving in a more volatile manner than equities!
Add in inflation at between 7 and 8% and investors in portfolios/funds which are designed to offer protection are being decimated in real terms. It once again shows how important it is to pay attention to your pension.
The China situation is not helping the inflation story.
China’s Covid lockdown has certainly not helped supply chains and has added to the angst around inflation.
Shanghai on Monday unveiled plans for a limited easing of its strict coronavirus lockdown, as economic and social pressures mounted on the Chinese financial and industrial centre, according to FT.com. Gu Honghui, Deputy Secretary General of the municipal government, said the city was dividing compounds into three risk categories, with several thousand so-called ‘prevention areas’ to have their lockdowns lifted if they reported no cases for a two-week period. The announcement came more than a week after Shanghai was plunged into a citywide lockdown as part of escalating restrictions aimed to curb mainland China’s biggest coronavirus outbreak in two years.
Disruptions to Chinese supply chains have intensified following the complete lockdown of Shanghai, exacerbating strains on transport and logistics as stringent measure have bought activity to a grinding halt.
“Shanghai is economically important for both China’s domestic economy and trade with the rest of the world,”said Johanna Chua, Head Asia Economist at Citigroup. She added that waiting times for semiconductor deliveries had already increased and that “with Shanghai’s significant trade links to East Asia, this could have spill over impacts on regional supply chains”, particularly in South Korea, Taiwan and Vietnam. “The Shanghai Covid lockdown will have a global effect on almost every trade”.
US recession is not predicted
I liked this comment in Bloomberg today; “to be clear, a recession is not our base case, and our positioning does not reflect an anticipation of one,” said Solita Marcelli, Chief Investment Officer Americas at UBS Global Wealth Management.
“Still, we think that equities will be somewhat range-bound until investors gain more conviction in how far inflation will fall, how high the Fed will raise interest rates, and the impact of Fed rate hikes on economic growth”.
I’ve just read this back to myself by way of a proofread and no doubt you are pleased to have such a short script this week as there is not too much good news to report. Sadly, it looks like Putin is committed to full-on warfare and at times like this we should just be grateful for everything we have.
Gloomy as this all seems, it’s just a moment in time and as we well know things can change for the better very quickly.
Have a wonderful Easter.
Gary and the Blue Sky 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.