Please find below our Investment Market Update as at 21st January 2022.
Blue Sky Investment Market Update
I don’t like roller coasters!
I come from Blackpool, and I don’t like roller coasters. I certainly don’t like roller coasters in the investment markets!
If I ever have any doubts about the turmoil we are all experiencing, my youngest boy, Daniel (aged 19) is always there to remind me. In fact, he said to me on Wednesday over an evening meal “what’s happening with Transact? You need to spend less time on the golf course and sort it out because this is rubbish”.
I, of course, reminded him that up until this month his personal investments had averaged over 20% per annum (high risk portfolio) over the last five years, after all fees. I also pointed out that I spend a significant part of my day at the moment, undertaking in depth research, talking with investment managers and evaluating possible strategies. Okay, I did bite… children can be brutal can’t they!
Value vs. Growth
Much has been written of late about value vs. growth stocks.
Growth investors seek companies that offer strong earnings growth, while value investors seek stocks that appear to be undervalued in the marketplace. Growth stocks represent companies that have demonstrated better-than-average gains in earnings in recent years and are expected to continue delivering high levels of profit growth.
On the other hand, value stocks are companies that have fallen out of favour but still have good fundamentals. The value group may also include stocks of new companies that have yet to be really recognised by investors.
So, what is best right now, growth or value stocks? Some studies show that value investing has outperformed growth over extended periods of time. Value investors also argue that a short-term focus can often push stock prices to low levels, which creates buying opportunities. There is no doubt that there are such opportunities now as we embark upon a global recovery and a weakening of restrictions around Covid.
However, growth stocks ordinarily perform well during economic recovery and the earnings of some companies can continue to achieve high earnings growth, regardless of economic conditions.
So, what’s the best strategy?
As we well know, we are in the midst of unprecedented times. The extraordinary amount of stimulus has fast tracked the investment cycle, yet the economic cycle in some ways has lagged. Valuations across many sectors have soared and earnings have been strong. However, institutional investors and traders have suddenly switched emphasis into value companies and, as a result, those companies with strong earnings growth have been indiscriminately sold.
In 2021 we saw similar rotations, but this has now been exaggerated by an about change in monetary policy. We believe that there has been an over-reaction and most growth stocks have been caught up in this vortex of indiscriminate selling.
- Have good companies suddenly become bad companies… no
- Does it mean that the game is over for sustainability… far from it, in many ways it’s only just started
- Are we likely to experience a boom in economic growth… yes
So, the signs are good but, in many cases, economic growth has to unfold to justify many valuations. On saying this, the recent pull-back presents an opportunity to invest at a lower point and certainly, many investment fund managers are taking full advantage to invest in stocks which have been battered over the last three weeks.
To answer the question as to what is best, growth or value stocks, we believe that a combination of both is the right mix at this stage of the cycle. This approach should mean that we gain throughout most economic cycles and in theory enjoy smoother returns over time. In theory!
The transition is not easy though, especially in light of recent dynamics. We will gradually transition and reposition when we feel it is right, being mindful not to crystallise short-term losses wherever possible.
An optimistic outlook
We are still very optimistic and don’t apologise for investing in companies with strong balance sheets and predictable earnings – quality companies. We see many opportunities but as suggested in previous communications, the investment markets will likely experience many lurches and spikes as we progress through the year.
The green revolution will be fuelled by investment in public infrastructure which encourages job creation and an increase in productivity. Furthermore, the cost of clean energy technology has fallen significantly. Add into the mix the change in public sentiment and increased regulation around carbon footprints, a huge amount of transformational change awaits.
Then consider an article that appeared in Investment Week just days ago. It highlighted a bullish outlook from the vast majority of fund managers. The emphasis being that a global re-opening after two years of Covid-19 and lockdowns, will trump any fears of rate hikes by the Federal Reserve. The Global Fund Manager Survey from the Bank of America (BofA) stated that many are expecting inflation to fall as they look to the future with optimism, despite expected tapering of quantitative easing programmes.
The macro-outlook regarding global growth and profit expectations was viewed as stable, with 71% anticipating a “boom“, while over half of the global fund managers believe inflation will be transitory.
36% of the fund managers believe inflation is permanent. A net 48% forecast lower inflation. The biggest tail risks which could impact the global economic outlook were seen as hawkish central banks, inflation and asset bubbles over Covid-19.
BofA also highlighted that investment fund managers are starting to shift from credit to commodities, growth to value, tech to banks “but not stocks to bonds“, nor developed markets to emerging markets.
The above survey highlights that fund managers are bullish on equities and cyclicals. They are long on equities, particular in the EU as well as cyclical banks, commodities and industrials whilst they shun bonds, defensives, technology and emerging markets.
At Blue Sky, we reduced our exposure to technology way back in May and at the same time we increased our European exposure and our holdings in financials but now is the time to transition further in a quest to achieve even more diverse portfolios which should, in turn, lower volatility.
Investing is never an exact science but the process of arriving at prudent decisions remains constant.
Look out for our switch recommendations next week as we transition portfolios towards the new phase in the investment cycle.
Have a good weekend, wrap up warm but enjoy these lovely crisp sunny days… and don’t worry!
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.