Please see article below from Waverton received yesterday – 26/01/2022, which details some of their thoughts on the recent market volatility.
Investors have been concerned about inflation and about the potential for tighter monetary policy to counter it. UK CPI is up 5.4% from a year ago; RPI is up 7.5%, the highest since 1991. In the US, CPI is up 7.0% on a year ago, the highest figure since 1982. The market expects inflation to be above the central bank target of 2% on both sides of the Atlantic over the next five years. There are signs of wage inflation rising, not just in official statistics but also in what companies are saying about their business prospects in earnings reports, which are coming out this month and next. The unemployment rate is 4% here and 3.9% in the US so the pressure on wages may well be higher in coming months.
The Bank of England raised interest rates in December for the first time since 2018 and also in December the US Federal Reserve Board not only increased the speed with which it intends to reduce its bond purchase programme (so called “Quantitative Easing”) but also discussed the possibility of reducing the level of its bond holdings later this year. That would be an additional tightening of monetary policy on top of any interest rate increases, just as Quantitative Easing is an additional easing of policy above and beyond interest rate reductions.
Tighter monetary policy is making the market rethink the outlook for the economy and for companies. For a number of the fastest growing companies valuations have been elevated relative to history for much of the time since 2009. Higher interest rates will challenge the sustainability of those elevated valuations.
Markets are also likely to have one eye on the growing geopolitical tensions, with developments in Ukraine and Taiwan making the headlines.
In this difficult environment the UK market is outperforming the World index. Partly this is because the UK market does not have many high growth companies trading at elevated valuations. Partly it is because the UK market has a heavier weighting than the world index to energy, financials and consumer staples which are among the sectors that are outperforming.
At Waverton we build global equity portfolios for our clients. The UK market has a weighting of 4% in the World Index and although your portfolio has a higher weighting than that, the vast majority of our portfolios are invested in companies listed overseas. So a period of drawdown in those markets will impact our returns.
It is also worth highlighting that as well as a declining stock market, investors have seen bond investments lose value as interest rates have risen.
Against this backdrop, in building equity portfolios we remain focused on bottom-up fundamentals, ensuring that the companies we own can maintain their competitive advantage, retain the flexibility to absorb higher costs, can continue to grow future free cashflow, with balance sheets that can withstand higher interest rates.
Within fixed income we have a diversified approach that we expect to navigate a sustained period of higher interest rates better than indices. We also expect longer duration bonds to perform better if we enter a prolonged period of stock market weakness.
We remain neutrally positioned in equities but markedly underweight fixed income. Our ability to diversify broadly across a range of alternative asset classes does help us navigate these testing conditions.
Please continue to check back for our latest blog posts and updates.
Charlotte Clarke
27/01/2022