Please find below our Investment Market Update as at 17th December 2021.
Welcome to the last weekly commentary of 2021.
I thought it worth reflecting on what has unfolded over the last year, with an emphasis on changing sentiment.
Overview of the year
2021 started with a great deal of hope and anticipation, particularly for the UK as we led the way with our vaccination programme. The UK stock market boomed, and the pound strengthened. Globally, the picture was less clear with a varied response to the deployment of vaccinations, concerns over weak supply chains and the likelihood of rising inflation.
As we moved into Spring, a feel-good factor was becoming evident as we began the transition towards achieving some resemblance of normality. Economies kick started into action and confidence soared. However, as the outlook improved globally, the UK economy began to stall feeling the triple whammy effects of poor supply chains, Brexit regulations and the difficulty of recruiting personnel. The pound weakened as a result, but this helped the performance of our more global portfolios, as the exchange rate proved advantageous.
The summer holiday season saw a relaxing of the rules around Covid with the hospitality sector moving through the gears and foreign holidays were once again allowed. Many businesses demonstrated their resilience, undoubtedly helped by the governments furlough scheme and all-round financial support.
As we moved into autumn there were three games in town influencing economic policy:
- Inflation
- Monetary policy
- Company earnings
Covid considerations were still there, but these three topics were largely dominating financial markets.
Inflation
UK index linked gilts enjoyed a resurgence on the back of climbing inflation. Not helped by rising energy prices. Gilt prices also began to climb as it looked more likely that the Bank of England would increase interest rates before the end of 2021. Bank stocks, after surging in the first few months of the year before ebbing away, enjoyed another resurgence… only to fall back again as an interest rate rise looked unlikely.
In the US it was expected that interest rates may rise in the middle of 2022, however, there were noises from the Federal Reserve about increasing rates earlier than expected. Inflation was largely seen as being transitory but concerns were rising around inflation remaining elevated.
Less of an issue in Europe where monetary policy is lagging, they have been clamouring for inflation for many years but, of course, inflation in energy prices can damage economies. There is good inflation and bad inflation.
Monetary Policy
In the early part of the year this wasn’t a main consideration but as prices and wages started to hike, the prospect of higher interest rates began to temper gains in certain rate sensitive sectors. Companies that could pass on increased costs due to higher wages, the increased cost of raw materials and higher debt repayments to their consumers became in vogue.
However, in the last couple of days Monetary Policy has changed dramatically with abrupt change in sentiment.
The Fed have recently announced a doubling of the reduction in quantitative easing and are now forecasting three rate hikes in 2022. By doubling the pace of tapering, it does put the Fed in a stronger position to raise rates significantly if necessary.
There was quite a surprise only yesterday when the Bank of England announced they are increasing interest rates to 0.25%. Interestingly, equity markets responded positively to the Fed and Bank of England announcements.
Company earnings
A recovery was undoubtedly underway but with so many factors at play, analysts and traders were looking closely at the US’s corporate earnings in the third quarter of this year. Within the S&P 500, circa 80% of companies either met or exceeded expectations. Good news for investment markets.
Now what?
Moving forward, the acid test is how companies respond to the new variant, Omicron. A new variant was expected and, whilst unpleasant, it doesn’t appear as intrusive as Covid 19. This was also expected. I think it’s also worth mentioning that as societies, we are also better prepared.
On the corporate front, we are likely to see a more nimble and efficient transitory response, as opposed to the sledgehammer reaction of 2020 when we were hit with the unknown. A huge number of companies are now no more efficient and have built up substantial buffers on their balance sheets. We like such companies, especially those with predictable earnings and whose underlying assets help protect us against inflation.
Thematic approach
We have embraced what we call ‘future proofing’ investments with gusto since way back in 2018; 66% of all the money we now manage is directly invested in Sustainable investments. Something of which we are very proud.
Not only can we hold our heads up high that we are making a positive difference across the ESG sector (Environmental, Social and Governance) but we also understood a long time ago that change was underway. A new paradigm was about to unfold.
Figures quoted to me the other day suggested that three quarters of all new money coming into the UK fund space, within the last three months, was being invested directly into ESG.
Of course, there are many other thematic sectors to consider such as biotechnology, e-commerce, infrastructure, renewable energy – all attracting walls of money from governments and companies alike. Our new Global Thematic portfolio is attracting a lot of interest.
Summary
We are not going to make any adjustments to our portfolios at the moment. We are not traders who take you in and out of markets quickly. We are always looking ahead with a view to optimising returns and protecting on the downside where possible.
We are pleased with our current positioning across the portfolios but we know sentiment can change quickly. Whist there has been some erosion of capital in equities over the last couple of weeks, this was to be expected and stepping back, compared with the news flow, many assets have proved very resilient to date.
We will watch diligently. A surge in equity prices overnight on Wednesday saw the S&P 500 rise by 1.63% despite everything that was going on. This was on the back of US monetary policy news that action was being taken to curb inflation concerns. It just goes to show that bad news is sometimes greeted by makeover news!
All that remains is for the Blue Sky team to wish you and your families a wonderful Christmas and a very healthy New Year.
Best wishes to all and thank you for your support.
Gary and the team.
Risk warning
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.