Please find below our Investment Market Update as at 20th May 2022.
That’s one unwanted variable out of the way!
This statement is nothing to do with the investment markets, but the Toffee’s victory over Palace last night which kept them in the Premier League. Sorry, but I had to mention it as feeling somewhat elated this morning. Being an investment adviser in these difficult times is hard enough but add into the mix the emotional rollercoaster of supporting Everton, then you can understand why my elation is tinged with fatigue!
The investment markets are certainly keeping us on our toes. A few clients had commented that it was nice to see portfolios rise over the week… that was until Wednesday when the Dow Jones index fell by the most points in a day since the early stages of the pandemic in 2020.
Target misses target
As I have mentioned many times, we are going to see many lurches in market prices in response to the slightest bit of economic and corporate news. Confidence is fragile.
This week it was the turn of the retail sector in the US to sound alarm bells. Target earnings tumbled by 41% and their share price fell by 25%. The reasoning was based around shipping costs as well as consumers shifting their purchasing away from TVs and other discretionary items. This came a day after Walmart missed their earnings target, again on the back of the cost of shipping and higher wage costs. All this points to a wider problem with regards to the broader economy amid hot inflation and weakening demand.
Longest streak of weekly losses
We have now experienced the longest streak of weekly losses for global equities since the financial crisis. Different issues of course, but in 2008-2009, at least safe haven assets behaved in a more traditional way. This time, many safe haven assets have had a very difficult time as bond yields have risen and bond values have, in turn, fallen.
UK gilts, for example, since the start of the year have fallen by 9.9% and UK indexed linked gilts by 12.62% (FE Analytics). Similar to some equity returns.
Central banks no longer have the tools of quantitative easing or interest rate cuts at their disposal and so we are just going to have to let this storm blow through.
The equity response at the onset of Covid was much more severe but it proved to be a short sharp impact as governments and central banks responded quickly. The response from the authorities this time is going to be limited.
Although there is limited scope for intervention, it has been widely reported this week that Rishi Sunak is looking to draw up plans to increase the warm home discount before cutting taxes. This comes on the back of the Consumer Price Index in the UK rising to 9.1% in the year to April, the highest one-year increase since records began in 1989.
The potential tax cut relates to income tax with it being muted that a 1p reduction in the pound from 20p to 19p is likely. The tax cut is scheduled for April 2024, but this is likely to be brought forward by a year, at the very least.
Whatever it takes!
The Federal Reserve (Fed) Chairman Jay Powell stated this week that they will continue to hike interest rates until it sees ‘clear and convincing’ evidence that inflation was returning to the 2% target. Yes, that’s 2%, which at the moment seems a long way off the 8.3% quoted in April, with higher figures to come.
What the Fed are trying to do is raise interest rates to a level that actively constrains demand if needed. The investment markets know this and hence why we believe much of the damage is already in the price of many stocks. Powell went onto state:
“Achieving price stability, restoring price stability is an unconditional need. Something we must do because really, the economy does not work for workers or businesses, or for anybody without price stability. It is the bedrock of the economy. If that involves moving past broadly understood levels of ‘neutral’ we will not hesitate to do that… we will go until we feel we are at a place where we can see inflation coming down”.
Economist have altered their forecasts
In an article on Bloomberg this week, it was stated that economists have slashed their forecasts on how much the US economy will expand this year. Economists are now stating that the odds of a recession within one year are 30%.
The US freight industry is a strong indicator with Cass Information Systems Inc. stating “after a two-year cycle of surging freight volumes the freight cycle has downshifted with a thud”. This is partly due to consumer demand and partly due to supply chain issues.
Innovation in the UK
I have alluded many times as to how important it is to not underestimate the nimbleness and entrepreneurial spirit of the private sector in the UK. Over the last few months, I have heard many success stories around how businesses have responded to their challenges over the last couple of years. It is these types of businesses which are likely to flourish moving forwards.
A report in Bloomberg this week responded to criticism that the UK is falling behind on innovation and start-ups. Paul J Davies, a columnist for Bloomberg, stated that in the past decade, the UK lured almost one third of all the venture capital invested across Europe and is home to one third of the region’s technology listings. It even outstrips all of Asia on these numbers and in Europe. It firmly punches above its weight.
Something I’ve highlighted many times with regards to the world’s second biggest economy is not to underestimate China’s ability to stimulate economic growth. We are expecting US markets to open strongly this afternoon and the FTSE 100 has risen by over 1.5% today at the time of writing.
In Asia, the Hang Seng index rose by 3% and Japan’s Nikkei 225 moved upwards by 1.3%. This was on the back of China cutting its benchmark mortgage lending rate by the most on record, after its property sector went into decline, exaggerated by the zero tolerance towards Covid.
Interestingly, this is at odds with the developed world where interest rates are rising. This stimulus reinforces why we decided to keep our Pacific exposure in our Momentum portfolio and further demonstrates how intervention from authorities can surprise on the upside.
Commodity markets still shining
Commodity investing has surged on the back of supply chain issues and uncertainty. At Blue Sky, back in February we introduced the L&G All Commodities ETF USD holding for 20% of our Momentum portfolio. This is a broad spread fund which includes a good exposure to agricultural commodities. Since the Ukraine invasion on 24th February, this fund has risen by 20.43%. It has certainly supported the resilience of the Momentum portfolio, relative to its counterparts.
Interestingly, we were initially tempted by the TB Amati Strategic Metals fund but decided against it in favour of the L&G fund. At one point, over the same time period, the Amati fund rose by over 20% but from 15th April this fund has fallen by 18.45% whilst from the latter date, the L&G commodity fund has risen by 4.01%.
Many commodity fund managers are now wary of an economic slowdown which may impact demand for metals. It just goes to reinforce how important it is not to generalise but also to look ‘under the bonnet’ of any holdings we include in the portfolio.
Other relative successes recently have been the re-introduction of the UK Foresight Infrastructure fund into our stand-alone infrastructure portfolio and as part of the Sapphire range of portfolios. This fund has risen in value by 6.98% since the invasion (source FE analytics).
The Foresight Global infrastructure fund has performed even better with a return of 8.28% over the same time frame.
On the infrastructure theme, our new addition into the Momentum portfolio of the Clearbridge Global Infrastructure Income portfolio, has worked. It has risen since its introduction on the 4th May 2022, on a relative basis. In just over two weeks, it has risen by 1.42% compared with, for example, the S&P 500 which has fallen in the same time period, by a significant 9.21%.
Whilst we have highlighted the positive impacts of some recent changes to our portfolios, there is no getting away from the uncertainty which is descending upon us all on a daily basis. Looking at your portfolio too frequently is not good for the soul, so once again we encourage you to look over sensible periodic time frames. We really do appreciate how difficult all this is to bear.
The changes we have implemented are focused on using alternative assets, infrastructure being a prime example. Our use of bonds across our portfolios is very limited.
It is worth remembering when we are in the teeth of a crisis, it is very difficult to normalise our thoughts and see beyond the immediacy. Some of the worst decisions we all make are in times of emotion and heightened uncertainty. That’s why we trust in our processes and our research. The financial crisis, Brexit, Covid are recent reminders of how quickly investment markets can reset and how the private sector is very quick to adapt and innovate.
What we certainly don’t want is an emphasis on austerity again here in the UK, like we saw after the financial crisis. Whatever you think of the government, this I believe, they do understand.
The storm will blow through, as they all have before. But, it may just hang around for longer than most of us originally envisaged.
Have a lovely weekend.
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.