Please find below our Investment Market Update as at 22nd July 2022.
What’s all the fuss about?
You could be forgiven for wondering what all the fuss is about, with equity markets performing strongly over the last few days. In the five days up until 21st July, the S&P 500 index (US) has risen by 6.15%, with the FTSE 250 also rising by 6.17%. Even the main European indices rose by circa 4.5%.
A bounce is very welcome after recent volatility and declines. It also reinforces how quickly investment markets can change and fly in the face of deteriorating news flow, something which I’ve alluded to on many occasions.
A main driver for the reverse in sentiment is around a less aggressive interest rate hike in the US. Stock markets rose as traders scaled back expectations of how high the US Central Bank will lift interest rates. In the near term, a 1% increase was accounted for but the rhetoric points to only a 0.75% rise.
As we have stated before, much of the fear is built into share prices but sometimes the fears are overdone. That is the way of the investment markets. Netflix for instance lost fewer subscribers than anticipated and their earnings per share beat analysts’ expectations.
Conversely, Tesla reported this week that revenue fell by 9% over the last quarter. However, it wasn’t all bad news for the company as revenue was up 42% from last year. One of the main problems with Tesla, is meeting demand. The prolonged lockdowns in China have resulted in production issues and parts shortages. Tesla shares are down by circa 33% for the year, as of 21st July 2022.
However, yet another reminder of how quickly change can happen in this current climate; only yesterday, Snap, an American camera and social media company, slumped 27% in late trading after their disappointing earnings were announced due to raised concerns about online advertising. This wasn’t just a problem for Snap and its shareholders, but there was a knock-on effect to other companies, like Meta, Pinterest and Alphabet in a similar space.
It’s important not to generalise
Be this around inflation, commodities, equities and indeed bonds. As you know we are mindful that economic conditions are likely to worsen and, in many cases, believe that corporate earnings may deteriorate as we have just seen for Snap. However, it’s not a given as Netflix demonstrates.
For our internal portfolios here at Blue Sky, we are focusing on removing assets from our portfolios which may be prone to a significant slowdown. However, conditions are now looking more favourable for other assets, including bonds. Early days perhaps, but we wish to focus on protecting portfolios from any dramatic economic downturns whilst also being primed to take advantage of opportunities.
As the title states, ‘it’s important not to generalise’. This was reinforced with a recent discussion I had with Legal & General Investment Management (LGIM) when they said “economic uncertainty is sky high. Outside of recessions and their immediate rebounds, growth and inflation uncertainty usually have a low impact on sentiment, and most of the time, other factors drive markets. But right now, economics is centre stage, and the picture is distinctly different in each of the world’s largest economic blocks”.
The latter comment is important and is a good reminder that our investment focus is not focused on the UK but more on a global reach. Important, when it is highly likely that the UK and Europe will enter into a recession.
It’s been brutal
I’ve covered off performance before, but I thought it was worth giving further context to what has been happening over the last few months.
Since the turn of the year, equities and bonds have struggled almost in unison. Bonds have been less volatile, but this hasn’t been desirable because prices have just followed a trajectory of steady declines – bonds not liking inflation. Pleasingly, we don’t have much exposure to bonds on a relative basis. Equities have had periods of hope but to use that well-worn phrase, “it’s the hope that kills you”.
An article in Investment Week provided a quote from the CEO of BlackRock, Larry Fink, where he described the current investment climate. “We have seen the worst start to the year in decades for both stocks and bonds. Investors are simultaneously navigating high inflation, rising interest rates and the worst start to the year for both stocks and bonds in half a century, with global equity and fixed income down circa 20% and 10% respectively”.
Economically, the outlook is deteriorating but equity valuations look attractive in many quarters. Weak sentiment was reinforced by the International Monetary Fund (IMF) who have cut their US Gross Domestic Product growth forecast to 2.3% for this year, from the 2.9% pace projected just a month ago. The IMF warned that a broad-based surge in prices poses systemic risk to both the country and the global economy. As reported on Bloomberg, it also lowered next year’s growth outlook and raised its view on unemployment.
With so much uncertainty, it is no surprise that some fund managers are deciding that now is a good time to buy equities in the belief that, over the longer period, history will point to a fantastic opportunity. At Blue Sky, we have no doubt that this will be the case.
However, we are not alone in our belief that inflation fears and aggressive interest rate hikes will likely impact corporate earnings which may spook markets further. There will be periods like we have seen over the last 2-3 weeks when there is an improvement in sentiment, but we can’t see a catalyst for a sustained resurgence just at the moment.
As I said earlier though, investment markets and sentiment can change very quickly and as advisers, we have to be very vigilant.
Investment Week reported that a Bank of America (BoA) survey highlighted that fund managers have recently reduced their net overweight position in stocks to their lowest level since October 2008. This has manifested in cash holdings being boosted to a 21 year high of 6.1% in assets under management overall. By comparison, LGT Wealth have circa 10% in cash holdings across their medium risk portfolios.
The US central bank is seen as unlikely to pivot away from tightening monetary policy until its preferred measure of ‘core’ inflation eases according to the survey’s respondents. BoA’s Chief Investment Officer said “investor sentiment was now so bearish that a short-term bounce for stocks and credit was possible. Any rally is likely to be temporary though. The catalyst for a sustained recovery will be a change in monetary policy from the Fed when it sees that Main Street is suffering along with Wall Street. We are still some distance from the kinds of levels that would cause policymakers to panic and change course”.
A contrarian view!
I was reading the comments of David Coombs, Head of Multi Asset Investments at Rathbones, this week on Trustnet. He stated “the minute Powell (the Chair of the Federal Reserve) steps up and says he’s ending rate hikes, that’s it, the opportunity is gone. The markets will go through the roof, those tech stocks you’ve been waiting to buy are up and you’ve missed the boat”.
We think this is a bit dramatic as they are trying to call the bottom of the market which is always very difficult. Just to be clear by the way, we are not getting rid of our tech stocks anyway!
Of course, by going into more defensive positions across our portfolios, if we don’t move quickly there is a risk of being left behind in the early rally. With this in mind, we are already preparing a switch notice in anticipation of this happening, although we don’t believe it will occur for somewhile.
IBOSS Chief Investment Officer, Chris Metcalfe, agrees in part with David Coombs, “the market recovery will be very rapid, just as it was after Covid hit markets in 2020, leaving investors a very slim window to act to catch the best of the market momentum”.
Inflation and the great British fry up!
Many of us are inclined to reach out for comfort food in times of anxiety and the great British fry up is no exception, although I must tell you I’m keeping well clear after my relatively healthy excursion to the Far East recently… and besides I’m not anxious, just focused!
It made me smile this morning when I saw an article on Bloomberg about their ‘Breakfast Index’, launched to measure the costs in the UK of some of the products required for a decent fry up.
I suppose it beats a parrot choosing the winner of the World Cup… no doubt it will be a camel this time around!
It will be no surprise to hear that the cost of ingredients jumped in price, rising 12.7% this year. But be careful, the cost of baked beans isn’t included because the prices aren’t tracked by the Office of National Statistics. If they were added the price would be even higher!
Almost everything is going up in price and this is now feeding through to consumers and companies. Higher interest rates are a by-product. The impact is unknown, as is the timing of the cycle.
Opportunities are presenting themselves, but most fund managers are now moving towards being more underweight in equities and building up cash positions. Those who are looking long-term are seeing this as an excellent entry point into the market.
At Blue Sky, for our in-house portfolios, we are of the opinion that it is prudent to reduce our equity positions but not across the board. We are being very selective and are keeping our exposure to areas such as technology, infrastructure and global themes, whilst also increasing our holdings in other domains. More about this when we send clients a switch notice next week.
Thank you for the feedback on these Commentaries. I hope they demonstrate that we take our responsibilities seriously and that we see it as a privilege to look after our clients’ money. I particularly say this because over the last few days we’ve had two potential clients tell us that their existing advisers haven’t made contact all year. Unbelievable!
Have a lovely weekend,
Gary and the Investment Committee
Photographer: Debbie Burrows/Getty Images
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.