Please find below our interim Investment Market Update as at 14th May 2021.
Blue Sky Investment Market Update
A washing machine of uncertainty
We all know that investment markets don’t go up in a straight line and, in recent days this has been firmly reinforced as equity prices have fallen. To make matters worse, the press decided to make the most of the situation. Just take a look at the headlines reported on Sky News yesterday.
“Britain’s leading share index has plunged sharply into the red for the second time this week as inflation fears grip global stock markets.”
Read this again. The language is not in the least bit emotive, is it? Furthermore, there was the same old picture of a trader sat in front of computer screens with his head in his hands… classic! Yet, the early losses for the FTSE 100 of 2.5% yesterday morning recovered to finish the day down by just 0.59%. These swings are normal fare in ‘normal’ markets, but we have got used to an upward trajectory on the back of all the stimuli being delivered by central banks and governments.
There is no doubting that we are experiencing a washing machine of uncertainty as forces pull against each other. Below are the main reasons why we have experienced turmoil this week:
- Strong growth, particularly in the US, is likely to lead to rapidly rising inflation which, in turn, suggests that interest rates will rise. This is deemed to be bad news for companies whose cost of borrowing will increase. There was a clamour for economic recovery, but the extent of intervention and stimulus appears to be happening too fast and now the fear is rising inflation.Inflation reports this week showed that consumer prices in the US grew at their fastest pace for 13 years.
- The early sell off this week was in part prompted by Chinese data showing a higher-than-expected increase in factory gate prices – seen as another inflation warning light.The MSCI China index has officially fallen into a bear market which means it has lost over 20% since mid-February. Beijing has tightened controls around big technology companies which has, in turn, raised concerns over liquidity.
China was the success story of last year when it came to stock markets but now it appears to be on the wrong side of investor sentiment.
- The market downturn also saw the oil price fall, with Brent Crude dipping 2% to less than $68 a barrel – attributed to the deepening coronavirus crisis in India.
Finishing the week on a brighter note
Yesterday in the US, equity prices recovered some of their ground with the Dow Jones and the S&P 500 rising by over 1% which helped boost European markets.
There was good news on US unemployment figures too, the best since the pandemic descended.
Asia-Pacific equities rallied overnight as global markets rebounded from a bout of volatility caused by inflation fears. The Topix in Japan rose 1.8% on Friday, while Hong Kong’s Hang Seng added 1%. China’s CSI 300 index of Shanghai – and Shenzhen-listed stocks – was 1.7% higher and Australia’s S&P/ASX 200 jumped 1% (source FT.com).
The FTSE 100, as I write, has once again broken through the 7,000 level with a gain of 0.6%.
A sense of perspective
Those who have been invested in equities since April 2020, have experienced some fantastic growth after the huge falls in February and March of 2020. Recently, Wall Street has hit new record highs and although the FTSE 100 has lagged it still pushed towards the 7,200-point mark having dipped below 5,000 points at its lowest ebb at the height of the pandemic.
Granted, clients who have invested this year in previously strong performing assets have experienced volatility in sectors such as technology and infrastructure. We still really like these sectors but, in the short-term, they have been victims of a change in emphasis as international investors have rotated into previously unloved stocks. Our response has been to gradually rotate into some of these areas too, but we are absolutely committed to investing in companies who have strong balance sheets and a good level of predictable earnings whether they are deemed to be growth or value stocks. A sentiment which has served us very well in recent years.
My son is now an expert!
My youngest son, at 19 years of age, has now become an expert in investing. To be fair to him, he has been committed to investing ever since we sat down a number of years ago and I helped him understand compound interest. He’s done very well by investing in dynamic stocks, including technology.
If you have children, you will understand me when I articulate his outlook. When the market is going up his view is “well, that’s what it should do”. If it’s going down, “it’s Dad’s fault”!
With recent market uncertainty he decided, like most in his peer group, that he wanted to turbo charge his returns and have more excitement. Bitcoin was now on the agenda. We had an interesting chat but, of course, being 19 years old, he knows best. He withdrew some money from his investment and was going to invest a four-figure sum. Last night I asked him whether he pressed ahead and invested? He sheepishly said yes. It turns out he only invested a three-figure sum. I asked him what he had lost. He said he didn’t know but, of course he did, he was just a tad embarrassed that he had lost 38% this week. At least this time it wasn’t my fault!
Needless to say, he doesn’t like Elon Musk as much as he did in the previous week. As reported in the FT, he has gone from evangelist to critic, citing the environmental impact of energy use.
What’s the immediate outlook?
One thing is for sure, if the Covid virus can be managed effectively then we are likely to see the strongest economic growth since World War II. Equities have surged on the back of stimuli, but some positions are unwinding due to fears of inflation, tighter regulations (particularly in the technology sector) and a rotation out of previously loved assets. This has caused a vortex of uncertainty which has seen a strong demarcation between winners and losers.
In our opinion, it is important not to chase markets irrationally but there is no doubting that to be too concentrated could mean missing out on returns. In December last year, we began diversifying into a broader range of assets and our recent switch has continued this philosophy. Sitting astride companies which embrace both the value and growth spectrum.
Ourselves and our investment partners have also repositioned aspects of our portfolios towards assets which will likely benefit from rising inflation. The switch last week towards a larger holding of sustainable real estate is a case in point.
Let’s hope the weather this weekend reflects the improved sentiment across the equity markets. Some heat please, then I will not have to consider going to Portugal!
Have a great weekend.
Gary 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.