Please find below our interim Investment Market Update as at 24th September 2021
Blue Sky Investment Market Update
We should have all gone away for the week!
It’s amazing how the news flow ratchets up when there is a bit of bad news about.
Earlier this week the markets wobbled but if you had been away on holiday for a week and hadn’t looked at what was happening with equity prices, today you would have thought that market activity had been benign and not a lot had happened.
The FTSE 100 for example, is higher today than it was a week ago and last night the Dow Jones index climbed over 500 points!
What was all the fuss about?
There were two issues worrying markets:
- A Chinese property firm, Evergrande, whose shares have plummeted this year by over 85%, looked like it was going to default on paying interest on its debts, having already missed interest payments to two of its biggest lenders on Monday.Evergrande has had to pay investors within the wealth management arm of its business with properties, as opposed to cash due to liquidity issues.
The company has borrowed more than £217 billion and is one of China’s largest companies. It has been badly affected by new rules from Beijing with a view to controlling how much money can be owed by real estate firms.
In the near term, the crisis has been headed off just in time with an agreement being reached with onshore bond holders over its next payment.
As reported in Investment Week, the ratings agency Fitch is sceptical about the Chinese property market following the new rules. According to a report in the Guardian, Fitch’s growth expectations for the world’s second largest economy decreased from 8.4% to 8.1%. The Chinese property market being the main cause for concern. Banks are predicting knock on effects with concerns for both equities and bonds.
- The other issue concerns the possible tightening of monetary policy and the impact on the global economy and markets. Of course, this is nothing new, but it comes to the fore whenever there is a wobble in investor confidence.
Warnings against removing stimulus
The Organisation for Economic Co-operation and Development (OECD) has urged central banks and governments to maintain their pandemic related support despite a rebound in global growth and rising inflation. In an article in Investment Week, the OECD’s recent stance was highlighted stating that growth is uneven as countries grapple with a range of issues, including bottle necks, vaccinations and inflation.
The thinktank warned that financial support for economies should remain while short-term uncertainty persists, adding that fiscal and monetary policy plans should be clearly set out by central banks. This should be combined with continuing loose monetary policy, such as low interest rates and continued quantitative easing along with clear guidance on just how hot they are willing to let inflation run before taking action.
Something we at Blue Sky agree wholeheartedly with as this would prevent much conjecture and uncertainty.
The OECD trimmed its 2021 world growth forecast by 0.1 percentage points to 5.7% but increased its 2022 prediction by 0.1 percentage points to 4.5%. Inflation is expected to peak at 4.5% across the G20 this year, before easing to 3.5% by the end of 2022.
Predicted interest rate rises
Nothing new here, but it was interesting to hear Goldman Sach’s view that it sees the Bank of England lifting the UK benchmark interest rate to 1% by the end of 2023. By this time growth should be strong and the need for monetary stimulus considerably weaker.
They predict the central bank will raise its benchmark rate from the current record low of 0.1% by 15 basis points in May next year and will follow that by a quarter-point hike every two quarters, economists Steffan Ball and Nikola Dacic wrote in a report. In the short-term, the Bank of England have decided to keep rates on hold.
Data this week showed that the number of workers on UK company payrolls climbed above its pre-pandemic level as vacancies hit a record high with companies battling staff shortages created by Brexit and lockdowns.
The trend away from UK equities
As reported in portfolio adviser this week, global equity funds have had the highest number of net inflows over the past decade. In 2020, net inflows into the Investment Association’s (IA) Global sector were three times higher than that for North America. However, despite the headline above, investment into the UK retail sector of funds had one of the best years on record in 2020. There was a 9% increase in net inflows.
Overall, assets held in UK equities have been on the decline for the past decade. In 2020, UK equities accounted for just 14% in funds under management, a steep decrease from 2005 when they accounted for 39% of total assets. Events like Brexit and the Covid pandemic have exacerbated this trend, the IA noted. Retail investors have pulled £16.5 billion from UK equities since the Brexit vote. Over that timeframe the FTSE All Share has trailed major global indices, even the MSCI Europe ex UK index.
However, the article doesn’t allude to the sweet spot for UK equities in the first 6 months of this year, due in the main to the UK’s strong vaccination programme. It does though, reinforce Blue Sky’s strategy, which is to largely embrace global assets.
Green agenda on the rise
Elsewhere, the IA said the trend towards greener investments was one of the “standout developments” in 2020.
Net retail sales into responsible investment funds accounted for 38% of total net investment. Funds under management in this sector grew by an impressive 60% over the period, though this still represents a small percentage (3.9%) of the total. As you know we have been an early adopter of Environmental and Social Governance (ESG) but we strongly believe we are still in the early part of this journey as investors transition.
The proportion of assets subject to sustainability focused criteria almost doubled in 2020 to 2.6% of total assets. You may be interested to note that in comparison, circa 66% of all money managed via Blue Sky is invested into Sustainable ESG orientated assets and 97% of all our clients have some direct holding into ESG funds.
Our focus, along with our investment partners’, is orientated towards companies with strong balance sheets and the prospects of good earnings and not stocks which are economically sensitive. As we transition through current market conditions this will stand us in good stead.
On the latter note, this week alone I have heard of two well run restaurants who have had to ‘mothball’ their company and shut down due to staffing and supply chain issues. Let’s hope this is short lived as the government has suggested!
For those of you who like golf… enjoy the Ryder Cup.
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.