Monday 24th January 2022
We have seen a sharp rotation in markets in the last few weeks from "Growth" to "Value" style investments which has meant sectors such as Healthcare and Technology have fallen faster than the markets overall. This has, in particular impacted the US market. If you take for example the NASDAQ index, which measures Technology stocks, such as Amazon, it is down this year to date nearly 10%. In addition sterling has strengthened by about 1% making your dollar held investments worth less when converted back to pounds.
This recent rotation has been due to a number of factors including an expectation of higher interest rates due to higher inflationary pressure, and also increasing economic activity due to economies opening up more as the Omicron variant proves less serious.
This compares to the UK FTSE100 index which has increased this year to date by 2.7% as our top 100 companies index has a high amount of Energy and Financials which will benefit with higher inflation and interest rates. Because of this you won't have seen much publicity about falling stock markets, as our own market has risen and our media prefer to report local gloom. Also, there has been plenty to keep them distracted so far this year.
The impact is that you will have seen falls in the value of your investments, but certainly not to the extent of the NASDAQ. The reason is that the funds we recommend are diversified across sectors and geographies to give a balanced portfolio. However, there is a leaning to growth orientated and sustainable funds who, by their nature are more forward looking. We believe they represent attractive investments over the medium to long term. Looking beyond the current market gyrations, the structural drivers of progress and sustainability have not gone away. These include the continuing digitisation of the global economy, and the intersection of information technology and biology. The rate of change, innovation and disruption with a drive for a better world in these areas is going to continue to increase in future.
It also needs to be put into context. Over the last two calendar years the returns of the NASDAQ and FTSE100 are:
FTSE 100 -14.34% 14.30%
NASDAQ 43.64% 21.39%
Sources:macrotrends.net and ukinvesting.com
As can be seen, the FTSE100 has basically stood still over the last 2 years whilst the NASDAQ has boomed. Fund managers won't try to chase what might be a short term rally, and we expect markets will swing back in favour of growth investments soon enough, although will be volatile.
A key reason behind the rotation is inflation, with data out this week that it hit 4.8% for the previous 12 months. This measure is the Consumer Price Index (CPI) and there is not much reporting about the Retail Price Index (RPI). While they both measure inflation using a shopping basket of goods and services, they take different approaches.
- RPI includes mortgage interest payments: this means it is "heavily influenced" by house prices and interest rates.
- CPI takes no account of housing costs: but factors in all the other goods and services.
RPI has usually been the higher measure so it's of no surprise that CPI is used for payments made by the Government, such as State and Public Sector Pension increases, whilst RPI is linked to money received such as train tickets, car tax and interest on student loans.
Higher inflation leads in general to higher interest rates. At the start of October last year there was an expectancy of just one interest rate rise in 2022 in the United States and now there is expectancy of four through 2022. So the question is if interest rates are rising, why haven't fund managers rotated more of the portfolio into cyclical sectors, to improve short term performance?
We'll let LGT Vestra's Investment Manager, Ed Sulivan answer below:
"The problem with this approach is that the investment landscape can change very quickly. We saw this last year when a similar rotation was stopped in its tracks by the Delta variant. There are plenty of reasons to think that Omicron may be the end of COVID19 restrictions but in reality, we don't know what is coming next. Similarly, the current rotation into Cyclicals / Value is largely predicated on above trend economic growth, rising oil prices and stubbornly high inflation. This may well end up being the case, but there are also a number of scenarios (both known and unknown) that could see these views unravel, causing a sharp rotation in the other direction. We want to buy companies that will do well regardless of the economic landscape, as they tend to be better businesses overall, and it protects the portfolio against unforeseen consequences (as it did in March 2020)."
Some Good News in 2021 that you may not be fully aware of:
Thanks to COP26 in Glasgow, 90 new coal power projects will be cancelled, another 130 are looking highly questionable, and 750 coal-fired power plants around the world now have phase-out dates, up from 380 before. A further 1,600 coal plants are now covered by carbon neutrality targets, 95% of the world's total. Guangdong, China's most populous province and one of its most industrialized, banned the construction of coal plants in the Pearl River Delta, the first ever crackdown on coal by a major Chinese province. Xi Jinping announced that China would not finance or build any new coal-fired power projects abroad, a huge deal for the world's biggest coal financier. (source spglobal.com)
Nine billion Covid vaccine doses were administered across 184 countries, and almost 60% of the planet has received at least one dose (in four months it'll be 75%). This is by far the most successful global health initiative ever undertaken. In less than two years not only did we come up with a way to overcome a brand new disease, but rolled it out to more than half of humanity. The vaccines have been incredibly effective, even against the new variants, with the global death rate falling by more than half from earlier in 2021. Naturally, the media has focused on all the problems — hesitancy, unequal access, 'pandemics of the unvaccinated', resistance to mandates etc. Lost in all the noise is the simple fact that by far the majority of the world's population has enthusiastically embraced the vaccines, and as a result, for the first time ever we have the chance to end a global pandemic on our own terms. Truly one of the greatest achievements of mankind.