Please find below our Investment Market Update as at 28th January 2022.
Another turbulent week!
It has been another uncertain week across investment markets, however, this week we have seen stronger buying signals after the recent correction. The pattern tends to be a recovery in early trading only for negative news flow to then create an about turn. This is not unusual behaviour as investors/traders are trying to work out whether the correction is over and there is a good chance of a sustained rally. Of course, geopolitical news doesn’t help with sentiment, in this particular case, Ukraine, Nato and Russia.
A summary from LGT Vestra
We received an excellent summary this week from LGT Vestra which served as a reminder of how markets can be volatile and how investing is not always ‘sweetness and light’. Here are their thoughts.
What has been unsettling investors?
- Tensions between Russia and Ukraine, and ‘The West’ have heightened. This is an incredibly fast-moving situation with discussions ongoing, and a situation we are monitoring closely. Russia’s annexation of Ukraine’s Crimean Peninsula in 2014 created plenty of volatility, but nothing that sent global markets into a correction and despite the aggressive rhetoric, it is unlikely that the Kremlin will want an outright war – especially considering the very strong counterpoints made by Europe and the US.
- When combined with concerns around the Federal Reserve (Fed) tightening, this sent global markets into a frenzy on Monday (24th January 2022). However, the Nasdaq Composite ended in slightly positive territory after dropping 4.9% at session lows. Earlier in the day, the S&P 500 was off by more than 10% from its record closing high from January 3rd, before recouping declines. The Dow recovered losses of more than 1,100 points to end nearly 100 points higher.
These three examples alone, over one trading period, really highlight the amount of volatility we are seeing in markets right now and reinforce the point I made above.
So far, the real extremes of the sell-off have been contained to the riskiest parts of the market and the more speculative stocks that have done well in the last two years – typically US based tech companies. Largely, our tech exposure is concentrated in profitable companies, with rock solid balance sheets and low net debt. Whilst these companies will not be immune from any tech related sell-off, they have the business models to survive and thrive once the correction has run its course.
Also, it is worth remembering that the economic backdrop does look robust and could improve further once the virus loosens its grip. We may even see the Fed deciding not to slam on the brakes as they had planned to do, preferring to take matters slow and steady so not as to spook markets further.
It is worth noting that the Fed have decided not to undertake a rate hike until March but the accompanying comments about the possibilities of future rate hikes once again sent many indices into a spin.
Looking through the noise
It can be difficult to remain calm when there is heightened volatility and an equity market correction. The last decade or so has provided an environment where we could produce strong equity returns but it’s worth remembering that equity market corrections are fairly common, with pullbacks in excess of 10% (defined as a correction) in 12 of the last 22 years (S&P 500). Of the 12, there were seven corrections more than 15%, three in excess of 25% and one in excess of 47% – yet the market climbed over 515% during this period.
The key to surviving any of these corrections, has been a balanced portfolio across asset classes and geographies, as well as a focus on quality companies with organic growth, strong balance sheets and low net debt – and that is exactly how LGT Vestra (one of our key investment partners) are positioned. This is also applicable to the sustainable range of portfolios and extends to the long-term secular system changes we tap into. Equity corrections are always painful to go through, but they are part of a healthy market cycle. The key to longer-term returns is to avoid panic selling and to take advantage of oversold conditions when they present themselves.
LGT Vestra reflected on previous market corrections in 2020, 2018, 2015/16 and 2008/09 pointing out that it is in such times where they (and the underlying active managers) are able to do their best work as they look to take advantage of investor panic and top-up long-term core holdings at potentially cheaper levels.
The world’s biggest economy
The US, according to a report in Investment Week, saw Gross Domestic Product (GDP) grow at 5.7% in 2021. What’s more, this is at its fastest rate since 1984, despite two new virus variants emerging in that year.
Growth however was uneven with the economy growing at 6.9% from October to December, a steep acceleration from growth of just 2.3% in the previous quarter. This growth created 6.4 million jobs but inflation rose to the highest in 40 years!
House prices fell by 0.7% in the last quarter, it is the third consecutive drop though it remained at 13.2% above pre-pandemic levels. Real spending at restaurants also fell in quarter four but it was still 2.4% above pre-pandemic levels.
Dividends are set to rise
Another report in Investment Week stated that the fund management house, Allianz Global Investors is anticipating an 8% growth in European dividends in 2022, which will lead them to record high levels. Very attractive for investors.
Their head of Global Capital Markets and Thematic Research said “as the world recovers from the effects of the pandemic, dividends will continue to make a substantial contribution to returns on equities”. This reinforces our positioning in Europe and adds to our recent conviction.
UK companies are also expected to increase their dividend payments, but only by 4%.
The Head of Collectives at Avellemy said “a key difference last year compared to 2022 is that the market had to effectively guess the reaction of central banks to rising inflation. Now we have a clearer idea of the picture ahead. As a result, the market is re-assessing high growth speculative companies.
I have written at length about the shift of capital towards ‘mega trends’. They are not immune from corrections but there is no doubting that there are longer term forces and traction at play.
According to research by RBC Asset Management, over 90% of wholesale investors, including wealth managers, believe mega trends such as ESG will play a vital role in their fund management strategy over the next three to five years. Yes, 90%!
The Bloomberg Intelligence report delivered a similar message in their predictions for 2025. The report said; “our world is currently being shaped by deep and powerful mega trends. There are structural shifts in society that are massive, transformative, global and unstoppable. This affects our economies, our cultures, our lives and our planet. As with major changes, the mega trends create both opportunities and risks. By anticipating and understanding these changes, investors can capitalise on the potential investment opportunities they create.”
Besides ESG, the other mega trends that are expected to shape the future are healthcare innovation, changing population demographics, rapid urbanisation, and the maturing of emerging markets. ESG however remains the dominant trend and the amount of capital expected to be deployed in this sector is set to rise significantly. Climate change and resource scarcity are expected by 66% of investors to be the most investable area, followed by technological advancements at 63%.
Ironically, sectors which are struggling right now, but when short-term sentiment changes, so will their fortunes.
Market conditions are difficult for many sectors. I would encourage you to not keep looking at your valuations for a while as there is no point in torturing yourself when in amidst of a short-term correction.
Remember, what LGT Vestra stated about the S&P 500 in that over 12 out of the last 22 years there has been a correction of 10% or more. In other words, normal service has been resumed and this is not unusual, especially after a strong rally. However, there is no doubt this correction has been sudden and painful. Keep the faith!
For our internally managed portfolios, today we have sent out our switch recommendations. Please responds as soon as possible where relevant.
Have a great weekend.
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.