Please find below our Investment Market Update as at 13th May 2022.
Blue Sky Investment Market Update
Anyone got a crystal ball?
As we all know, investment markets are a forward-looking indicator and therefore it follows, with so much uncertainty around, that investment houses are clambering over themselves to make sense of what is coming down the tracks. The range of opinions are wide and diverse, but nobody has a crystal ball.
We find ourselves in a very strange situation. On the one hand there is the expectation that economic growth will begin to recover as the impact of Covid and its variants begin to weaken. A big tick here.
On the other hand, soaring inflation and rising interest rates are going to create a drag on economic growth. No tick here!
You could be forgiven for thinking that these factors may cancel each other out but if either one surprises then this will have a significant impact on economies, consumer and business spending, and corporate profitability.
The tilt and momentum are currently skewed towards rapid inflation, exaggerated by the Ukraine invasion. The question is, how high will inflation go and how long will it be elevated? Then, to boot, how aggressive will interest rate hikes be and to what extent will this create a drag on consumer spending. Investment markets do not like such uncertainty.
Damned if they do and damned if they don’t
Central banks are limited in what they can do, unlike when Covid-19 first hit. A time when they created more quantitative easing and even lowered interest rates slightly, along with financial support packages from governments. Any such broad ranging stimulus at this juncture would only serve to add to the inflationary problem.
The only real response from them is to raise interest rates but, of course, a good proportion of inflation has been outside of central bank control. Supply chain issues have continued, particularly regarding China and Far Eastern economies which have in turn elevated prices. Add in the Ukraine crisis and the impact on energy prices, as well as soaring commodity costs, and it is clear why uncertainty reigns.
On the contrary, the US economy has been running ‘hot’ with very low unemployment, accompanied by strong corporate profits. Inflation concerns were getting more “airplay” in the last few months of 2021 which ultimately spooked investment markets as monetary policy sentiment switched quickly. Little did we all know at the time how aggressive inflation and monetary policy would become. At the start of 2022, it was expected that interest rates in the US would probably rise 2-3 times throughout the year. The rhetoric quickly changed with a rate rise now expected nearly every month!
The Federal Reserve has since attracted criticism from some quarters that they were found wanting and should have raised interest rates much earlier, limiting the monetary shock that is now unfolding. In hindsight, probably a fair criticism but it was a difficult balancing act coming out of Covid.
Important not to panic
The news flow is certainly not good for the soul (rarely is it) nor is the daily monitoring of investment indices. We have seen significant swings of late, albeit, with the overall trend being downwards. Stock markets have whipsawed on the slightest bit of news, fearing the worse!
Looking at your investment portfolio on a daily basis is certainly not good for your mindset with so much volatility. I read a tongue in cheek one liner this week which suggested the best way of reducing volatility in a portfolio is “not to look at your portfolio for a few months”!
LGT Wealth made a good comment about investment behaviour, stating “there’s a fine line between waiting for a good trade and pulling the trigger out of fear, so don’t let your emotions get the better of you”. Easy to say, difficult to do, we know. Short-term movements can be indiscriminate like we have seen in the Sustainable and Technology spaces.
Technology sell off
Whilst we reduced our direct technology holdings about a year ago, naturally, technology is integral to most businesses. To understand more about the sell-off, look at these numbers provided by LGT Wealth for an array of technology companies. The losses since the start of the year are painful, yet the pullback is just a blip in the overall returns of these companies since inception.
Company 2022 performance up to 4th May
Whilst these figures are significant it does present an opportunity for new money. Warren Buffet (the renowned investor) recently stated “amongst the volatility lies a wealth of opportunity”.
I always find it fascinating that when equity markets are volatile and/or have endured a correction, appetite for investing from the general public is weak. Conversely, when equity markets have posted strong returns there is a real appetite for investing. As a rule of thumb however, the best time to invest is when others are most fearful.
LGT Wealth reinforced this view when they spoke about how we are wired emotionally in the context of investing. There’s the thrill and excitement when the market goes up, but panic when it falls. The way our emotions change during the highs and the lows is why lots of us decide to invest when markets are doing well and sell when markets are falling. This goes against basic, good investment practices like thinking long-term.
They went on to say, reading blaring headlines or seeing the value of your investments fall isn’t fun. It can be worrying. Sure, there are always bumps along the way, but that’s the nature of investing. Something our long-standing Blue Sky clients are now used to. However, even for the most experienced investor, each crisis is still painful and difficult to endure.
What does the future hold for equities?
I liked the comment in MarketWatch this week when it suggested “one thing to realise about a stock selloff: you won’t know it’s over until long after it ends”. Some analysts believe that the severe corrections we have seen, and the whipsawing of stock prices is typical of a market nearing the bottom. Others think that there is more damage to come before consistent buyers are tempted back into markets.
To provide some context, it’s worth considering alternatives to investing. Cash is clearly guaranteeing you a loss against inflation. Bond valuations are plummeting in this environment and whilst this is happening with most equities currently, the prospect for a recovery is far from compelling in the bond environment compared to equities.
Add into the mix, the attraction of rising dividend yields, you can see why investors will still favour equities over other types of assets.
We will also not be surprised to see a number of share buybacks from directors at these levels. Whilst many businesses have seen their share price indiscriminately fall, their business are in a good fettle. Such buy backs will effectively be buying shares at a discount.
Furthermore, as we mentioned recently, price adjustments and elevated levels of cash are likely to feed the appetite for merger and acquisition activity.
Housing market signs
A good article in Proactive Investor quoted Sarah Coles, the senior personal finance analyst at Hargreaves Landsown who said that caution crept into property market in April despite rising prices.
“Some agents reported that they were having to do an awful lot of legwork for sales, as prospective buyers took their time making a decision. Several of them said that buyers and sellers were getting increasingly cautious, and one said that every single buyer now asks just how much longer price rises can continue. One agent stated that buyers were starting to struggle to get mortgages and that lenders were uncomfortable with the immediate outlook for the market. There’s also a good chance that lenders have changed their affordability criteria to take account of rising costs, which is making it more difficult for people to stretch themselves. Another agent said this is causing some chains to fall apart, as mortgage companies don’t think properties are worth their asking price,” Coles said.
“However, the number of properties going up for sale has dropped again, which is going to keep prices rising. Almost every agent complained that they didn’t have enough homes on their books. It means that we can expect sales to ease off and price rises to slow rather than anything more seismic,” she suggested.
The housing market is what we describe as a lagging indicator whereas stock markets are a forward-looking indicator. On any economic downturn it is stock markets which are first out of the blocks in terms of collateral damage, but it is also the case that they are the first to recover. Reinforcing the earlier statement “that you won’t know it’s over until long after it ends”.
The Crypto Currency reprieve didn’t last long!
It appears that the majority of young people have dabbled in crypto currencies of some type. Research by Interactive Investor found that 45% of young adults aged between 18 and 29 have made crypto their first investment of choice, with many funding this through a cocktail of credit cards, student loans and other loans.
Crytpo companies like Coinbase and Microstartegy have fallen by over 50% in the past 5 days as coin prices have plummeted. Bitcoin has crawled back up from its low of US$26,000 but at a nudge above US$28,000, it’s down over 20% over the last five days.
The FCA is rightly concerned about this market, particularly with regard to regulation and how young people are being lured into funding investment with debt.
Whilst my boys aged 25 and 20 are fortunate enough not to have debt, they said to me only last night, that they are not going to invest into crypto anymore as its too painful. They are instead wish to invest into our safer ‘Blue Sky Momentum portfolio’… which just happens to be our higher risk portfolio. It’s all relative!
A rabbit out of the hat?
We’ve become accustomed to being bailed out by authorities during recent crises but as we mentioned at the outset, the wriggle room for central banks is limited. It may be that once again governments step in to ‘lessen the pain’.
Dame Sharon White, the Head of Waitrose and a former senior civil servant, said “the government need to pull another rabbit out of the hat, much as it did during the height of Covid pandemic. I thought the government did incredibly well at the pace and scale during Covid, I think we need to see the same decisive action taken at speed and at pace.”
What the appetite is in government circles will become clearer in the next few days and weeks.
Statement from LGT Wealth regarding their Sustainable approach
I thought I’d paraphrase the latest communication from LGT Wealth regarding their Sustainable portfolios, the core holding for many of our clients.
“High inflation and the resulting threat of higher interest rates is deemed negative for more growth-oriented, longer duration assets. This is because any increase in rates, even small ones, can have a large effect on valuations; these are growing businesses with a large proportion of earnings expected in the medium to long-term. Tech and growth stocks, which tend to be highly rated, are therefore disproportionately hurt by higher yields, which have also been ticking up in response to the central banks’ more hawkish stance. In effect, these growth-oriented companies (of which a number form part of our sustainable universe) have undergone a ‘de-rating’”.
The Sustainable portfolios remain positively exposed to strong structural growth themes such as renewable energy, circularity of resources and increasing demand for healthcare. Although structural growth themes are seldom insulated from the moves in markets, these sustainable themes are now becoming entrenched in government policy and as such we believe that being on the right side of policy and regulation will continue to support expectations of the portfolio and enable us to generate longer term value for clients.
A positive example
One example of this is the RePowerEU energy independence strategy set out by the EU to shift their energy reliance away from Russia, which has committed to tripling the investment into renewable energy. This marks a big near-term acceleration in the development and expansion of the renewable energy supply chain. Rapid investment into emerging technologies not only supports top line growth of many names held in the portfolios, but it also helps support greater efficiency gains through significant investments into innovation and research and development.
However, LGT in response to the crises, have pivoted some of their exposure away from some growth assets with a longer duration timeframe towards shorter-term value exposure and cash. This doesn’t detract from our belief that quality growth companies linked to a durable and less economically sensitive themes should be well positioned over the long-term, even if earnings growth is weak.
Bonds and equities fall in unison
I’ve written about this before, but it has been reinforced by LGT Wealth. What is interesting is that if we were to end the year today, 2022 would be the first time since 1969 that bot bonds and equities will both have posted losses. Our belief at Blue Sky is that equities will recover and keep that statistic anchored in 1969.
Have a great weekend.
Gary and the Blue Sky 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.