Please see below, an update from Blackfinch regarding their approach to investments going forward in 2022, received yesterday evening – 15/02/2022
Markets have been volatile so far this year as the prospect of higher-for-longer inflation and rising interest rates have weighed on investor sentiment. These risks have been most pronounced in company valuations, which last year reached historically high levels in certain stock market sectors.
In general, when interest rates rise, investors can look elsewhere for returns instead of buying richly valued shares. What we have seen in 2022 is a reversion to more normal valuations as investors rotate away from the returns potential available from ‘growth’ stocks into more traditional ‘value’ stocks trading at levels below what they are believed to be worth.
It’s important for us to review the fundamentals of the companies we invest in before making a significant switch into other areas of the stock market. For example, the US is typically known as a growth market due to its dominant technology sector. These companies are often high quality, with investors required to pay higher valuations based on more attractive prospects. Currently, large cap companies in the S&P 500 index are reporting earnings for the fourth quarter of 2021. For the earnings season to date, 356 companies have released updates, and aggregate sales growth year-over-year has been 16%. On the same basis, earnings have increased by an even bigger 27%. However, this year the S&P 500 has fallen almost 6% (for sterling-based investors). This disconnect between strong fundamentals, but declining stock prices is due to the deflation in valuations that has driven stock markets this year.
Looking at individual companies, even though earnings have been strong, stock prices have still declined. Apple, Microsoft and Alphabet announced results that beat expectations – Apple was the standout performer after generating $124bn of revenue in a single quarter – yet their share prices are all down so far this year. We still hold these companies in the portfolios through our S&P 500 index fund.
Although this has declined in 2022, we view the underlying fundamentals of the companies as highly attractive and have retained our exposure to this fund.
Our portfolios also hold quality-based strategies in Europe, such as Premier Miton European Opportunities and Liontrust Special Situations. In much of the same way as the US market has fallen, both funds are down so far this year. However, on a longer time horizon, both have delivered top quartile performance compared to other funds in their respective sectors. We believe that quality companies with competitive advantages and growth potential still offer investors attractive returns over a long-term holding period.
We also allocate assets to traditional value sectors to diversify our portfolios. The UK offers higher income from dividends when compared to other developed markets. However, although value sectors have outperformed this year, we have avoided changing our allocations to overweight. For example, with the price of crude oil rallying to an eight-year high, profitability in the Oil & Gas sector has been raised, and therefore the sector looks attractive in the short term. However, as we believe the Oil & Gas industry is in structural decline, we would not feel comfortable holding significant exposure to these assets over a longer period.
The risks of inflation and rising interest rates will, no doubt, have an impact on returns for investors this year. However, looking further ahead, we still view holding quality companies with attractive growth potential as the best drivers of long-term returns. We will continue to update you on our portfolio activity as the economic outlook progresses.
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David Purcell
16th February 2022