Ten Years
Last weekend’s Jubilee celebrations got me thinking about the Diamond Jubilee. That does not feel like it was a full ten years ago. So much has changed in the economic and investing landscape since then, the following are just a few:
- The UK was just getting used to the Government’s austerity programme
- Brexit was still years away
- Inflation had just drifted above 2%
- Climate change and ESG investing were still quite niche
- Hardly anyone had heard of crypto currencies let alone invested in them
- The price of oil was lower and there much talk of peak oil and how much was actually left.
Back in 2012, Paddington Bear was a youthful 64 years old – how truly wonderful was the opening sketch with Her Majesty.
An overview of markets this week
Last Friday, the US released employment figures that easily exceeded expectations. This implied that the US economy, at least for now, is shrugging off higher inflation and continues to grow. In more normal times, this sort of reassuring update would have reduced fears of a recession and that the much hoped for soft landing was on track. The contrary view however took hold, and this was that the continuing strength of the jobs market would leave the Federal Reserve with no option but to be more aggressive with its interest rate rises. The latest US inflation data is due later today and is keenly awaited.
Several notable figures are predicting trouble ahead for the US economy with Jamie Dimon, who runs JP Morgan, advising us to ‘brace ourselves’ ahead of a hurricane and Elon Musk saying that he feels ‘super bad’ about the economy. Dimon explained his concerns centred around there being too much money in the US system (which is to be gradually removed by reversing the quantitative easing policy) and the Ukraine conflict making commodities more expensive.
No one would deny that risks are heightened but with both men being fond of a headline, it is not impossible that part of the language was a message to the Federal Reserve for more action. Slightly contradictory were the latest JPM investment bank comments that they see, again in the US, that the second half of the year will see a strong recovery but only in certain sectors.
On a more positive slant, a number of commentators have said that they do not currently see the likely conditions for a serious recession – with interest rates still likely to be historically low even after the mooted rises, employment strong, consumers still spending and companies still profitable.
Royal Bank of Canada, talking about the US stock market said “We are trimming our S&P 500 year-end 2022 price target to 4700 from 4860. We are continuing to bake in a slower economic growth backdrop in 2022-2023 but not a recession.” Given that this index currently sits at around the 4200 level that would be welcome.
The golfer Lee Trevino once said that there was no future for dogs chasing cars or pros putting for pars – I would add weather and stock market forecasting to the same category. Putting your name to a specific number for any index by a set date has long been notoriously difficult but it does demonstrate the continuing breadth of opinion when looking at the same facts.
Historically, other world stock markets have taken their lead from the US. Frustratingly, the UK often seems to react to all the bad news and only some of the good news. Whilst there will always be a strong link, we are seeing more of a decoupling now with governments following more domestic agendas to suit their own challenges. The underlying make up of an index is also making big differences, with the UK stock market holding up well. The political machinations with Boris Johnson so far have made little difference and it is the continuing strength of commodity prices supporting our largest companies and so the FTSE. The UK market has long been home to a number of what are termed ‘value’ companies with often more dependable earnings and dividend policy. Right now, these have shown relative strength and the FTSE remains the best performing major market of 2022.
China is pressing ahead with a further covid reopening programme during June, alongside a plan to stimulate the economy and consumer confidence. They have much economic ground to recover but the government has much more control than any other administration to make this happen. There is conjecture about just how much ‘ammunition’ they have to influence their economy as they once could but do not be surprised to see some clever financial engineering. Last month, China saw its exports rise 4% year on year, a small but sure sign that supply chains are improving.
The problems in Europe remain unchanged with the war in Ukraine showing no signs of easing. The move away from Russian energy remains expensive and economically damaging. On the positive side, unemployment is the lowest on record but as elsewhere this may be influenced by post-covid structural changes with people leaving the workforce. European consumer confidence rose slightly last month but remains at a low level.
The latest meeting of the European Central Bank yesterday did not deliver any new surprises. Inflation sits at a fresh high, interest rates will be put up by 0.25% next month with a further likely rise in September. They have increased inflation expectations and lowered growth expectations – though the latter is still above 2% for each of the next 3 years.
LGT Wealth May Update
The following is a short summary from LGT, and we are meeting their team in a couple of weeks for a more detailed update which we will of course pass on to our readers. This update highlights their flexible approach to asset allocation, with 8% held in cash in the Balanced mandate, though rightly they remain focussed on a long-term strategy around investing sustainably.
Markets were somewhat treading water in May with most indices finishing broadly flat over the month after a poor start. There were a couple of positives which triggered the rally seen towards the end of the month, including potential signs of peak US inflation and the corresponding reduction in expectations for US Fed interest rate increases. Inflation remains for the time being, with energy inflation moving higher again towards the end of the month. One of the reasons was a rebound in activity from China now that Shanghai emerges from another tight lockdown and has resulted in higher oil demand.
In Europe, countries such as Germany and Spain have printed multi-decade high inflation and as more data comes through, we are seeing just how integrated the world economy is and how the war in Ukraine and pandemic related constraints are causing broad based inflation.
However, should the Organization of the Petroleum Exporting Countries (OPEC)
look to exempt Russia from its oil production deal in light of sanctions, this would open the door for greater supply elsewhere and potentially put downside pressure on energy prices. Although sustainable portfolios are not directly exposed to oil, the impacts have been felt. But we remain convinced that capitalising on the recent weakness to invest in alternative energy offers a great opportunity to futureproof portfolios and remain ahead of government regulation.
Despite markets stabilising in May, it is clear that geopolitics remain uncertain and during the month we further bolstered our exposure to more value orientated businesses. The sustainable portfolios remain focused on delivering long-term returns through sustainable leaders, but we acknowledge the need to balance the style biases within portfolios and increasing this exposure does not impede our ability to allocate capital towards long-term sustainable leaders.
Food security has also been another key concern to arise from the war in Ukraine and although we have exposure to sustainable agriculture themes within portfolios, we expect this part of the market to see greater investment as countries look to shorten supply chains and create stability in essential goods and services, such as food and energy.
That’s all for today folks, have a wonderful weekend.
Best wishes,
Gus and the Investment Committee |