Investment Update (1)
The start of 2022 has seen significant downward movements in almost all markets. 2020 was a remarkable year for growth stocks with undoubtedly some companies hugely benefitting from the pandemic.
2021 saw market sentiment move early in the year towards value stocks then move back to favouring growth stocks, which saw many markets reach peaks in late autumn. Sentiment changed when inflation was viewed as less transient and likely much higher for longer. It was already expected that 2022 would see central banks change strategy increase interest rates over the year. As inflation moved higher expectation of many more frequent interest rate rises became the expectation which has unsettled markets. Interest rate increases are the main tool that central banks use to control inflation.
Most commentators agree that elevated levels of inflation are not permanent and should see significant reductions from early summer onwards and that the number of interest rate rises may not be as many as feared. The impact of all of this impacts the present value of future earnings and thus markets appear overvalued and have sold off indiscriminately. The sell off has been exacerbated by the huge spikes in energy, problems with the supply chain and most recently anxiety of the potential conflict in Ukraine.
Some companies have benefitted from this global uncertainty, notably oil and gas, banks, and mining companies, which are major components of the FTSE 100, which has badly lagged most markets but currently has a new lease of life, although for how long is questionable. Prior to the pandemic these types of companies struggled as did the whole asset class.
Our preference has been and continues to be for funds that are seeking to identify companies that are growing revenues and profits well above trend, have pricing power and are not dependent on certain macro-economic conditions prevailing for their success. Unfortunately, there will be uncomfortable periods such as this, but our conviction remains that the funds identifying such companies will continue to deliver over the long term, and we believe this is what matters. Performance should be viewed over 3 years as a minimum but realistically longer. Short term rapid movements are unsettling, but it is important to let the storm pass as undoubtedly it will.
The current markets also make bonds and other fixed income asset classes a challenge for investors to navigate. Rising interest rates impact capital values and provide few safe harbours. The need to find alternative asset classes is essential and has not been helped by the lack of liquidity in direct property, which until the referendum was a reliable friend.
Since the financial crisis markets have delivered strongly but not without periods of turmoil that cause investors concern. It is dangerous to make forecasts, but our conviction remains that over the long term the modern companies will deliver for investors, but our minds must remain open. Our approach remains not to attempt to be dependent on any macro-economic environment but place our conviction on the strength of the fund manager to identify opportunities which will deliver over the long term.