In another 2 weeks it will be 2 years since I issued my first News & Views and that was at a time when the UK had just gone into the first lock down with Covid and I felt then, that with an uncertain future, that it was important to keep communications open on a regular basis. How much has happened and changed in that time?
As always, time is an illusion, inasmuch that you look forward to something that is 2 years away and it seems a lifetime and yet, you look back 2 years and the time seems to have gone in a flash!
Although I am not issuing my newsletter quite as frequently, I have received very good feedback, which makes it all the more worthwhile and I am always pleased to hear your comments and thoughts. (If however, it is not of interest to you and you would prefer not to be included, do let me know and I can easily remove you from the mailing list.)
Just at the moment, the main global headlines are all about the conflict in Ukraine and the humanitarian catastrophe that is unfolding there. I never thought that we would see this type of conflict in Europe again and I sincerely hope that a diplomatic solution can be found to stop the bloodshed, although I fear the reality is that this will be dragging on for the foreseeable future. I cannot begin to imagine how those poor people must feel and one line I read the other day that has stuck with more than any other is a simple question – if you had to leave your home now and could only take with you what you could carry, how on earth do you address that?
Sadly, I feel there is little we can do individually that will make a difference but hopefully, with the collective efforts of our respective Governments and diplomats, they will be able to find a way though this and perhaps our part to play is not to be too upset at the price of fuel at the pumps or the increased cost of groceries, which is a direct knock on effect of the rising oil price.
Where I can perhaps add some value, is in regard to the impact on markets and what we might expect to see from here in the short, medium and longer term.
At the end of last week, we had the news that the Chernobyl nuclear site had been attacked by the Russians and that sent significant jitters through the markets all of which closed the week in negative territory. I had thought that we would see a bounce back on Monday but over the weekend, the oil price spiked and markets were further down when they opened this week.
Since then, the oil price has eased a little and today, we are seeing that bounce back I had been expecting. With markets swinging by plus or minus up to 5% in a day, this is the bare face of volatility that we often talk about in markets. With those levels of movement, making the right investment decisions is of paramount importance and that is where the research and analysis is so important with the Fund Managers we work with.
I talked about time being elusive earlier, and another example is to think that 2022 is only 9 weeks old and yet it seems so much longer since we were looking at the 2021 year end positions which had shown remarkable recovery since March 2020, when Covid first took hold!
Reading today the investment commentary from LGT Vestra, one of the fund management groups we work with, they talk about the markets in 2022 having 3 distinct phases of 3 weeks apiece. Their commentary reads:
The first three weeks of the year were about rising inflation and interest rate expectations. The next three weeks of the year were much more characterised by the financial results being released from companies in the US, sometimes leading to 20% or more share price movements in either direction. Latterly, the evolving Ukrainian crisis and the resulting economic sanctions on Russia have impacted markets. Year-to-date, value remains the global leader versus quality and growth, but at various stages of the year, leadership has changed hands.
In their last sentence, there are 3 words that are used in the investment world which deserve clarification. These are Value, Quality and Growth. These are general descriptive given to different types of stocks.
Value is referring to Companies which are trading at a lower price than their performance may indicate.
Growth is referring to Companies that tend to increase in capital value, rather than yielding high dividend income.
Quality is defining Companies with higher and more reliable profits, low debts and sustainable earnings.
In the first phase this year, Value stocks held up well but the events in Ukraine have led to a significant reduction in most value stocks, with Banks and airlines in particular. The exceptions are energy and commodities with higher oil and gold prices for example.
This year, we have actually seen some of the largest falls in Growth stocks, particularly in some technology companies, which for the last ten+ years have been the main drivers in terms of market values overall.
Although Quality stocks have been impacted by the higher volatility this year so far, this is the area where many Fund Managers are focusing their attention, as they believe this is where the “winners” will be found which will help to drive future portfolio values.
As always, my observations are at a very high level and do not dig into the detail, but I hope you will find this to be a useful summary of some of the factors that are affecting investment values. How this plays out in terms of future fund performance will all take time to be seen.
In the short term, volatility may well see reduced values but in the medium and longer term, I am confident that we will see portfolio values recovering. As always, we will maintain close contact with the managers we work with to ensure that clients objectives remain in focus.
Without a doubt, these are challenging times and in the short term, let’s hope we see the situation in Ukraine take a positive turn and we will keep in touch.
Above all else, take care and stay safe.
Best wishes from all at RAFP