The Month In Markets – June 2023

July 10, 2023July 10, 2023

The Month In Markets - June 2023

June’s monthly note could very easily read “See May monthly note”. The key themes of elevated UK inflation and excitement around artificial intelligence (AI) that were discussed in May have dominated markets in June as well.

As can be seen from the chart it was generally a good month for equities, and a bad month for anything non-equity. It appears the equity market is taking the glass half full approach, shrugging off higher interest rates, instead focusing on the prospect of the global economy avoiding a recession and companies being able to deliver strong earnings growth over the coming years. This is most evident within the US equity market, which, after a weak 2022 has rebounded very strongly in both the month of June, and 2023 more generally. Non-equity assets had a more disappointing June, and fixed income assets have had a lackluster 2023. They have adopted a more glass half empty mantra, with persistent inflation and higher interest rates plaguing the asset class in 2023.

Let’s dig a little deeper into the US equity market, which continued to rally in June. We have written about the strength of the AI focused stocks in recent notes, which have almost single handedly propelled the US equity market higher. Although not covered in the charts, it was pleasing to see increased breadth in the US market – the equal weighted S&P 500 index actually outperformed the S&P 500 index (market cap weighted) in June. Over the course of 2023 the equal weighted index is still lagging by circa. 10%, despite the recent rally. Stronger economic data coming out of the US in June was likely a driver for the broader rally. We witnessed Q1 GDP come in at 2%, a big rise from the 1.3% estimate, showing the US economy is still growing at moderate levels, despite many commentators expecting a recession to be upon us already.

The theme of AI has certainly not retreated, and we have seen companies such as Nvidia and Apple continue to do well. In May, Nvidia’s market cap hit $1 trillion on the back of a huge AI driven rally. Not to be outdone, Apple closed on 30^th June with a market cap of $3 trillion, a new closing-high for the stock.

The technology sector, and Nasdaq index more broadly, were hit hard in 2022, with higher rates negatively impacting valuations. Many commentators had suggested that high valuations were valid in a world of ultra-low interest rates, however, with higher rates, lower valuations were appropriate – we witnessed a de-rating of valuations in 2022. Interestingly, this year we have seen interest rates and bond yields (at the short-end of the curve) continue to rise – if the playbook of 2022 was in play, one would expect the technology sector to have continued to struggle this year. The opposite has been the case, and we have seen technology and other growth stocks re-rate (become more expensive) in spite of rising interest rates. It will be interesting to see if this strength can continue.

The UK equity market was the weakest developed market during the month (in sterling terms). As noted at the beginning of the article, elevated inflation has been a burden for the UK and June was no different. Headline inflation was reported at 8.7% once again, when it was expected to fall, while wage growth and core inflation for the month of May (reported in June) were both higher than expected. The result of this saw the Bank of England (BoE) raise interest rates by 0.5%, taking the rate to 5%, it’s highest level in 15 years. It’s worth noting that the US Fed did not raise interest rates at their previous meeting, while the BoE in fact increased their pace of hikes from 0.25% to 0.5%, highlighting the UK’s continued fight against inflation. With the market now pricing in peak UK rates at around 6%, there has been increased scrutiny on the UK economy, and question marks over whether the economy can handle that level of rate without a recession ensuing. The UK mid-cap index, which is seen as more domestically exposed, has significantly underperformed the UK large cap index, which has more international exposure, by revenue. The gap was around 2.5% in June, however if we look back over the last 18 months when inflation expectations began to increase, the gap is around 30%!

The UK equity market is now trading on a discount to its own history and a significant discount to the rest of the world. While the outlook is indeed challenging, and not being made easier by higher interest rates, the economy at present is performing ahead of where most CEOs and economists expected. We’ve seen consistent upgrades to economic growth forecasts throughout the year and in the month of June saw profits upgrades from key retailers Next and ABF (Primark owner), not something one typically associates with a troubled consumer. The market is clearly pricing in much tougher days ahead for consumers, but right now, the consumer is standing strong. One of the reasons for this is likely to be the delayed response to higher interest rates – indeed many people have enjoyed significant wage increases, but are yet to see debt payments, such as mortgage costs increase yet. Savers are also benefitting from greater returns on their savings, and this is propelling the ability to spend.

And so to bond markets (fixed income). US and UK government bonds and high-quality corporate bonds fell in price during the month. This was largely driven by increasing interest rate expectations in both countries. Typically, bonds have an inverse relationship to interest rates. While US inflation was reported at 4% during the month, the US Fed struck a hawkish tone at the press conference, highlighting their willingness to resume interest rate hikes to tackle inflation. As touched upon already, the UK BoE didn’t’ just talk tough, they acted, by raising rates by 0.5%. We have seen yields on UK government bonds with short maturity (1-3 years) rise to above 5%. With inflation expected to fall towards 5% by the end of the year, government bonds are starting to offer positive real returns once more.

Emerging markets and Asia continued their struggles, once again partly driven by China. During the month, China cut interest rates on short-term borrowing in an effort to help kickstart the economy. With an inflation rate of just 0.2%, there is little concern that reducing interest rates will lead to problematic inflation levels.

The end of the month also brings an end to the first half of the year. Within equity markets last year’s losers (US growth stocks) have become this year’s winners, while the winners of 2022 (such as banks and oil) have become this year’s laggards. Developed market government bonds are yet to catch a bid, and have continued to suffer, albeit to a much lesser extent than 2022. We do believe these bonds are offering a lot of value on a forward-looking basis, while also likely providing good diversification benefit to equities. The short-term outlook for the global economy has a high degree of uncertainty at present, however most equity markets have discounted some of this uncertainty into prices. With such uncertainty and much of the interest rate pain yet to be felt, we do think one needs to tread a more cautious path. With high expected nominal returns on assets such as cash and government bonds investors can now be compensated without taking excess equity risk at this stage in the cycle.

Appendix

5-year performance chart

Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

Andy Triggs

Head of Investments, Raymond James, Barbican

The Month In Markets – May 2023

June 16, 2023June 16, 2023

The Month In Markets - May 2023

May proved a very tricky month for UK assets, with both equities and bonds suffering meaningful drawdowns in the second half of the month. Elevated inflation data appeared to be the main driver of the UK underperformance, with markets now pricing in UK interest rates to peak at 5.5% in 2023.

On the surface the UK inflation data looked ok; headline inflation fell to 8.7%, the first time the year-on-year figure had been below 10% since August 2022. However, the fall in inflation was less than had been expected and importantly core inflation (which strips out volatile items such as food and energy) came in at 6.8% – the highest reading since 1992. The worry is that high inflation expectations are becoming embedded in consumers’ minds and as such wage demands will be elevated, which in turn will force businesses to raise prices to protect their profit margins – a vicious inflation loop is created. In order to ‘break’ this inflation psyche, the Bank of England (BoE) may be forced to raise rates to such a level that it leads to rising unemployment, which should in theory reduce the upward pressure on wages and lower demand for goods and services in the economy – all of which should lower inflation.

The market now expects UK interest rates to peak at 5.5% later this year. Interestingly, interest rates are only expected to fall to 4.8% by the end of 2024. This is now quite different to the outlook in both the US and Eurozone, where interest rates are expected to fall much further by the end of 2024.

As we have written about previously, there is often an inverse correlation between interest rates and fixed-income prices. We witnessed both UK government bonds (gilts) and UK corporate bonds fall in value in May on the expectation of higher rates. UK equities were also hit hard, most likely driven by concerns higher rates may limit consumption and spending, which would be bad for corporate earnings.

The excitement around artificial intelligence (AI) reached new heights this month. The main beneficiaries have been the largest US technology focused companies, with Nvidia the poster child of this hype. During the month Nvidia released their Q1 earnings and were very positive about their future, expecting strong demand for their products (microchips) on the back of an AI revolution. In the immediacy after the results, the company added around 25% to its market cap, a staggering $220 billion! At one point the company market cap rose above $1 trillion. The strength of the largest companies in the US stock market have masked what has been pretty anaemic share price performance from the average US company this year. The narrowness of the market has presented difficulties for diversified portfolios; however, we still believe this is a sensible approach.

There are dangers with investing purely in stories and narratives and potentially avoiding fundamental analysis. We only have to look back to 2020 and some of the ‘COVID’ beneficiary stocks such as Zoom and Peloton. Share prices advanced so much and became disconnected from fundamentals, and the outcome was that share prices subsequently came crashing down in a magnitude of approximately 90% from the highs. The thesis was correct in many ways – remote working was a positive for Zoom and more and more people are likely to exercise from home, benefitting Peloton, however, expectations were just too high and as a result share prices disappointed following the initial large rally. We saw a similar case with Beyond Meat – a company that produces plant-based meat. Shortly after listing on the stock exchange the share price rose above $220 a share in 2019 as investors became attracted to the potential for huge growth as consumers shifted to more plant-based diets. Once again, the thesis is broadly correct, however, investors overpaid for the story and the current share price is around $12.50 – a fall of over 90% from highs. Now we are not necessarily predicting this for some of the AI beneficiaries; however, we are mindful of being overly exposed to this part of the market at these valuations.

Japanese equities have been strong in 2023 and this continued in May. The country remained in lockdown longer than many of its developed peers, which held back the economy. However, after fully reopening in the second half of 2022 economic growth has modestly picked up. There continues to be reform in the Japanese stock market too, which places a greater emphasis on governance, engagement and shareholder value creation. All this has made Japanese equities more attractive to investors and helped boost share prices. It’s worth noting alongside this Japanese equity valuations are low by historical standards which may have also contributed to the moves.

In terms of global economic outlook, the anticipated recession is still not materialising and economists are either giving up on this view or pushing out the start date to 2024. Economic data continues to be conflicted, with the labour market remaining healthy and business surveys picking up. This is offset by the tightening of lending standards by banks and a cooling of housing markets, driven by much higher mortgage costs. This friction in economic data can make it challenging to have a strong conviction in positioning. In this environment we believe diversification continues to be a sensible approach, while also paying attention to valuations across asset classes. It’s pleasing that we are finding opportunities selectively across bonds and equities, which offer good value over the medium-long term.

Appendix

5-year performance chart

Andy Triggs

Head of Investments, Raymond James, Barbican

The Month In Markets – July

August 10, 2022August 10, 2022

The Month In Markets - July

The month of July did not particularly feel like a great month. There was little to no progress with Russia’s invasion of Ukraine. Inflation data continued to come in at eye-wateringly high levels. Supply woes continued and Google searches for the word “recession” spiked. Yet despite all of this, risk assets in general produced strong positive returns during July.

So why did the price of developed market equities and bonds rise this month? We don’t believe it was caused by an improvement in the short-term economic outlook, given economic data was weak during the month.

Additionally, it wasn’t because inflation appeared to be peaking. The most recent inflation data reported came in at 9.4% and 9.1% in the UK and the US respectively, reaching fresh 40-year highs. It was interesting to see that bonds and stocks prices increased despite these higher-than-expected inflation rates, as opposed to earlier in the year when these assets declined in value as a result of heightened inflation data.

What then was driving markets, if not positive data? We believe that during this month, investor attention shifted, and asset prices entered a strange state in which bad economic news was embraced. If inflation worries dominated the first half of the year, then concerns about economic growth dominated July.

The market has begun to discount the possibility of central banks having to backtrack on their interest rate hikes, something that is being referred to as the “Fed Pivot”. If the economy shows too many signs of slowing and the risk of recession increases, central banks could be forced to pivot away from the higher interest rate path and either pause or even cut interest rates in order to support the economy. The weak economic data of July fueled investors beliefs that the “Fed pivot” was coming into play. Historically, inflation falls in recessionary environments as demand declines, unemployment rises, and business investment slows.

Thinking at very simplistic levels, if the problems affecting the asset markets this year have been high inflation and rising interest rates, it makes sense that asset prices can rebound if we start to consider a world where inflation could fall, and interest rates won’t reach the lofty heights that were previously expected.

We can draw parallels from the final quarter of 2018, leading into 2019. Although inflation was muted then, the US central bank was embarking on the final leg of their interest rate hiking cycle. Quarter 4 of 2018 and the month of December were very tricky for equity markets, as they begun to price in a higher interest rate environment. However, by the end of the year, economic data had deteriorated, and the market determined that rates would not reach the previously priced in levels and in fact the US Fed would pivot and begin to ease monetary policy. This is what occurred; the US Fed never raised rates in 2019 and instead cut rates later in the year. In terms of asset prices, we saw equities and bonds perform very well in 2019 as valuations for equities increased (due to lower rates) and bond yields declined (prices rose). While we aren’t categorically saying it will happen again, it is always useful to study similar periods in history and take both downside and upside risk into account.

The old adage of “buy low, sell high” may have also been in play in July. The first six months of the year have been extremely challenging with steep declines in bonds and equities. There will be some long-term investors deploying cash at these levels. Large parts of the bond universe are offering yields that we haven’t seen for a decade. There are risks associated with this, but we know starting yield is a good predictor of future returns. Likewise, equity valuations have contracted this year and for investors who believe the price you pay matters and impacts future returns, July provided an attractive long-term entry point.

You will notice from the monthly chart that Asia ex-Japan and Emerging Markets equities lagged their developed counterparts. One of the biggest drivers of this was weakness in China, which is the biggest country exposure in most Asian and Emerging market benchmarks. Over the month there were renewed lockdowns as COVID-19 cases were detected and China implemented its Covid-zero policy. This rattled markets, while it has also taken its toll on the population, with dissent rising in the country. The Chinese real estate market was also under pressure in July, with reports from S&P Global Ratings that property sales could fall 28%-33% in 2022.

In times of heightened volatility investors are often more susceptible to behavioural biases. It’s likely many investors wanted to run for the hills and sell to cash after such a difficult June. However, in doing so, they would have missed out on an exceptionally strong month of July. No doubt these investors are now wrestling with the difficult decision of whether to invest at much higher levels than four weeks ago.

While we believe in active management and making tactical changes to portfolios, it is very rare that we make big sweeping portfolio changes. This is a very purposeful approach, and is a process designed to remove (or at least limit) our own emotions getting in the way and leading to sub-optimal decisions.

Andy Triggs

Head of Investments, Raymond James, Barbican

Appendix

5-year performance chart

The Month In Markets – June

July 12, 2022July 12, 2022

At a headline level June was yet another tough month, in what has been a difficult first half of 2022. However, the chart below does not provide the full picture of what occurred during the month, where key market changes could have implications for asset prices going forward.

For the majority of 2022 the market’s focus has been on inflation. More specifically it has been on the fact that central banks around the developed world were behind the curve on inflation and would have to raise interest rates more than they were telling us, in order to help cool inflation.

That provided a very difficult backdrop for both bonds and equities, which largely sold off in lockstep and in turn provided a very difficult backdrop for multi-asset investors. We typically hold assets such as government bonds to act as a hedge to equities; that clearly hasn’t worked this year.

However, during the month of June there were signs of a shift in the market’s focus. The market has now become nervous that in reacting to inflation, central banks, and in particular the US Fed, could now tip economies into recession. Their efforts to cool demand will effectively go too far (something referred to as a “hard landing”), destroy too much demand and ultimately lead to a recession. Now this is by no means a given, however, the probability of this occurring has increased. In effect, a risk that was not on investors’ minds six months ago, has now appeared.

The shift from inflation concerns to growth concerns resulted in some changes in market leadership. Commodities, which have been on a tear this year, and are seen as economically sensitive, nose-dived from mid-June. High-yield bonds, which react negatively to growth concerns also went south during the month. On the flip-side, government bonds, which have been moving downwards this year, appeared to buck that trend and held firm while equities fell during the second half of June. The UK market, which has been very resilient this year, had a more challenging month. The index has significant exposures to sectors such as energy and mining which were dragged down by falling commodity prices.

Concerns around an economic slowdown or even recession would make most people run for the hills. However, things are rarely that straight forward, and its important to think through the various scenarios that could play out.

In a slowing environment, where demand is weaker and commodity prices fall, inflationary pressures could ease. If inflationary pressures were to ease, the need for higher interest rates would diminish. Now if most of the problems this year have been because of higher inflation and higher interest rates, then falling inflation and slower interest rate rises could in theory be supportive for a wide range of assets.

This is now being referred to as the “Fed pivot”, and there are considerable amounts of column inches being dedicated to this subject matter currently. The view is that the actions of central banks (and markets) so far have now been enough to slow the economy and cool future demand which will bring down inflation. In this environment the US Fed will not need to be as aggressive going forward and could pause, or even pivot and shift away from their tightening interest rate policy. Parallels here can be drawn from 2018. The US Fed were raising interest rates, which led to a very volatile final quarter of 2018, with equities falling significantly and bond markets also struggling. However, by the end of the year, the hiking cycle stopped, and indeed pivoted, and 2019 was a very strong year for both equity and bond markets.

As is often the case, trying to call the bottom in markets is a difficult and dangerous game. The low in markets in the financial crisis was in March 2009 and the bottom for Covid-19 was in March 2020. This was prior to the jobs data announcement that showed 20 million people lost their jobs in one month! These turning points still felt extremely uncomfortable and there seemed little improvement in the situation. Yet markets are forward looking, and they behave in ways that is often not reflective of the here-and-now, but more reflective of where we will be in the next 12-24 months.

Portfolio activity in June within our bond element of the portfolio saw us reduce exposure to some of the more economically sensitive areas (such as high yield) and add in more US government bonds (unhedged). Overall, we continue to make portfolios more resilient to economic downturns, but are also mindful that risk assets, such as equities, have fallen considerably this year and that central bank policy could change in the coming months.

Andy Triggs

Head of Investments, Raymond James, Barbican

Appendix

5-year performance chart

The Month In Markets – May

June 13, 2022June 13, 2022

The Month In Markets - May

Markets stayed jumpy in May, although after several months of turmoil, the swings in market direction aren’t causing quite the stir they were as the year began. Having plunged, but then rebounded, global equity markets ended up making a small loss for the month – a blessed relief compared to the steeper falls that have plagued investors for much of the year.

The UK stock market was May’s standout performer, as it has been for most of 2022. It would be lovely to put this down to some kind of jubilee-inspired rush of goodwill, but the unromantic truth is that it’s caused by the UK market’s heavy exposure to energy and mining companies.

The twin shocks of inflation and the war in Ukraine continue to drive most natural resource prices higher, with the latter having thrown fuel onto what was already a decent-sized inflationary fire – originally caused by pent-up post-COVID demand colliding with supply-chain bottlenecks. This has boosted the share prices of the UK market’s large oil and resource companies.

Very little of this has much to do with the British economy. Instead, it’s a reflection of which behemoth global energy and mining titans choose to list themselves on the London Stock Exchange (as well as the absence of any global technology titans).

To get a truer feel for what’s happening to our economy, it’s more telling to look elsewhere, such as the fortunes of the pound and of smaller UK-listed companies (as these tend to be more reliant on the UK economy, although not exclusively so). On this front, 2022 has been less rosy: While the multinational-dominated UK large-cap index has made positive returns, UK-listed smaller companies are down by around 10% for the year.

Sterling has also had a tough time of it: If you’re taking a trip to the States in the next few weeks then, assuming you make it through the airport, you’ll be spending almost 8% more to buy a burger than if you’d flown on New Year’s Day (and that’s only on the currency move – food price inflation will leave a mark too).

But if the month provided any glimmer of hope for us Brits, it’s that markets seemed to calm down and improve over the second half of the month. So smaller companies made up some lost ground, while the pound clawed back a cent or two against the dollar.

The relief wasn’t confined to the UK though. Many other markets that had been under the cosh were given some respite. For us investors, perhaps the most noteworthy was the improvement in the share prices of ‘growth’ companies, in particular tech firms.

We’ve written about this at length over the past year or so. But to recap; after a decade and more of trashing everything else, the tech share hares have collapsed this year, dragging many markets – such as the US and China – down with them.

The cause of this is the return of inflation, and with it, rising interest rates: Higher interest rates impact the way investors value fast-growing companies, and not in a good way. With so much invested in these parts of the market, investors are frantically trying to work out if the last fortnight of kinder price trends mean the worst is over, or if they’re simply a resting point on a far longer descent.

The cause of this respite was tentative signs that inflation may have peaked, and that interest rate hikes might be less severe than previously thought. The emphasis is on ‘tentative’ here, as while some data has pointed to a slight moderation in the pace at which inflation is accelerating, there isn’t much of that data to go on, and other data has suggested otherwise. It’s finely balanced, and further releases over the coming days and weeks will provide more colour, potentially tipping the market either way.

But perhaps the most emphatic bounce-back over the month came from Chinese shares. These benefited from the same factors as mentioned above, but had a further boost from indications that the country’s zero-Covid policy, which still has the country on hard lockdown, may be eased.

Indeed, this news may itself have played into the hopes of easing inflation, as China’s lockdown has caused many of the bottlenecks that are spiking prices in certain products across the planet. If those bottlenecks are removed, price rises may begin to lighten up, and potentially even reverse.

It all adds up to a highly complex picture for global markets and economies, and trying to predict precisely what will happen next is difficult at best. We maintain that diversification is the best policy because the alternative requires knowing exactly which path the world will take, and when it will take it. And that requires a crystal ball. Or a time machine. If you have access to either, please let us know.

Simon Evan-Cook
On behalf of Raymond James Barbican

Appendix

5-year performance chart

The Month In Markets – April

May 11, 2022May 11, 2022

The Month In Markets - April 2022

It’s striking just how volatile markets have become. If I’d written this note a day before the month end (always tempting to knock off early before a bank holiday), then it would describe an unremarkable run for markets. But US equities fell by 4.6% on April’s final day of trading, dragging the global average with them, changing the tone of the month entirely.

The causes of this choppiness are the same we’ve been talking about all year: Inflation is the main culprit, along with the interest rate rises deemed necessary to tame it; and the events that are feeding that inflation, such as Asian COVID shutdowns, supply bottlenecks, and disruption to food and energy supplies caused by the war in Ukraine.

These are all adding to the other big feature of markets in 2022: the rotation. By rotation, we mean that everything that had been winning has started losing, while the losers have started winning.

One of those stumbling winners is the bond market. Save for the odd interlude, this has had the wind at its back for the best part of forty years. As a rule of thumb, bonds hate inflation. So, the fact that the double-digit inflation of the 1970s and 1980s gradually fell to the subdued levels we had (until recently) got used to, gave these assets an almighty helping hand.

One of the things that makes inflation so pernicious is that it can cause stock markets to fall while dragging down bonds too. Bonds – particularly gilts and treasuries – are held as a counterweight to the equities in a portfolio – part of their job is to go up as equities head lower, which brings balance to a portfolio. But this year they’ve dropped together, lessening their defensive impact.

And April was no exception. You can see from the chart that UK government bonds (gilts) dropped by almost 3% over the month, which puts them close to a 10% loss for the year. US Treasuries appeared to have a better month, but that’s only from your perspective as a UK investor: Sterling dropped sharply against the dollar over the month, and that’s where all the return for British holders of Treasuries came from. For a US investor, the losses in Treasuries were even worse than for a Brit holding gilts.

Tech shares and other high ‘growth’ companies are the other big stumbling winners. Many of these companies love the low interest rates that go hand in hand with low inflation. Partly because low borrowing costs help them to cheaply fund that growth, but also due to a quirk of how investors work out the value of such companies. So, like bonds, they too had enjoyed a great run, particularly following the financial crisis, which ushered in a decade of low interest rates.

But with interest rates rising fast, technology shares have had a tough time of it. Initially it was the more speculative firms that were hit – those companies that weren’t yet making profits, and whose success lay in an imagined future, not the reality of today. But more recently some of the tech titans have been dragged into the fray.

Netflix was the highest-profile casualty. News that its previously unstoppable growth in subscriber numbers hadn’t just halted, but reversed, shocked markets. Netflix, as it turns out, is more of a ‘nice to have’ than a ‘must have’ for its subscribers. That simple category shift caused its share price to halve in April.

It also led investors to question just how resilient business models are to the relentless rise in the cost of living. Google (AKA Alphabet) sank by almost 18% over the month, as investors worried about the revenue it receives from advertisers, who are themselves under the cosh from inflation.

Thankfully, as the word ‘rotation’ implies, some assets have fared a little better. Natural resources are an obvious example. These are on the right side of the recent disruptions, and their prices are rising with inflation. Likewise, listed infrastructure equities are also faring well. Their defensive properties, combined with inflation-linked contracts, make them stock market favourites in the new world. We’re pleased to report you have exposure to both in your portfolio.

Meanwhile, the Sharks to growth investors’ Jets are ‘value’ investors. This gang are generally more concerned about avoiding high share prices than finding the best or fastest growing companies, and after a decade in which their style consistently failed to work, their portfolios are bucking the falling trend. And it’s certainly been the value funds in our portfolios that have provided the best returns so far this year.

So, you will ask, how long will inflation last? And how high will it go?

We know better than to try to answer those questions. There were plenty last year who were quick to label inflation “transitory”, many of whom are now hastily recanting their forecasts (and counting their sizable losses). The trouble is, events like Putin’s invasion of Ukraine are inherently unpredictable, and yet they can have a deep impact on inflation. This simple fact alone should be enough to put us all off predictions for life. But, just as a hangover should put us off drinking alcohol, it’s all too easy to forget the pain they can cause, and be drawn back into the easy, albeit false, sense of certainty they offer.

With our ears closed to the siren song of economists’ predictions, we rely instead on considered diversification. This means we are always balancing your portfolios. That’s with a view to them withstanding prolonged inflation if we go down that path, but also not being damaged if the economy is taken in a different direction. It’s not an easy balancing act, but in a dramatically unpredictable world, we believe it’s the best approach.

Simon Evan-Cook

(On behalf of Raymond James, Barbican)

Appendix

5-year performance chart

The Month In Markets – March

April 6, 2022April 6, 2022

The Month In Markets - March 2022

Given what’s happening in the world today, you’d be forgiven for wanting to read this month’s market rundown from behind the sofa. But, true to their history, markets have marched to their own beat again: Despite the depressing backdrop, global equities made a positive return of almost 5% in March, while gilts, which are typically billed as safe havens that perform well in times of stress, fell by more than 2%.

This apparent disconnect is something we’ve touched on a few times already. At the risk of repeating ourselves, markets tend to react to investors’ perception of future events, while – genuine out-of-the-blue shocks aside – often not appearing fussed by what’s in today’s newspaper.

On this basis, maybe what we’ve seen this month is good news: Markets tend to be better at working out what’s actually going on in the world than any one individual (a phenomenon well described in James Surowiecki’s “The Wisdom of Crowds” – worth a read if you’re interested in this type of thing). The fact that they’ve rallied suggests the situation in Ukraine may be improving, at least by more than the relentlessly upsetting newsflow suggests, anyway.

But note that I’ve caveated that statement with words like “suggests” and “may”. We investors like to pepper our reports with terms like this; if we later turn out to be wrong (which we often do), we can always point to these couched terms as a get-out. And it’s right to do that here: Markets have a good record of predicting events before they make the news, but they’re very far from perfect at it. The world is always unpredictable, often taking turns that wrongfoot even “wise” markets.

This is one reason we don’t tamper with your portfolios on a daily basis. Like a defender facing a mazy Jack Grealish run*, you can end up being sent one way, then another, then back again, and ultimately end up on your backside, wondering what just happened.

Instead of chasing our tails by trying to “time” markets, we expend most of our mental energy finding good managers, each an expert in their own corner of the market, to run your money. That way, when times turn hard, they are well prepared for the unexpected. And so, as a consequence, are you.

We’ve had calls with many of the managers running pockets of your money over the last few weeks, and have been reassured by their confidence in their own portfolios (and that, in many cases, they were seizing the opportunity to invest more of their own personal money into their funds).

Outside of your portfolios, meanwhile, there are a fair few fund managers looking dazed and confused right now: As March began, the unsettling events in Ukraine pulled equity markets lower, particularly as the word “nuclear” began to crop up in the conversation.

This caused some to sell some of their equities. But, as you can see from the chart above, since that early-March low point, global equities have rebounded by almost 9%. So, as we stand, their snap decision to sell was a costly mistake.

Of course, it may still turn out to be the right decision. There’s nothing to say events can’t take a darker turn from here, taking markets lower with them. But, for now, the pressure will be on those who sold: Do they stick to their original decision and wait for a fall? Or buy back in at higher prices in case markets keep rising? And if they do buy back in, and markets then crash? Ouch. The whole process can take on a Basil Fawltyesque tone, desperately trying to correct one mistake after another, all the while digging themselves deeper into a hole.

Away from the Ukrainian tragedy, the month also saw a renewed focus on one of our other regular talking points of the last few months: Rising inflation and interest rates. Inflation numbers have continued to come in higher than experts were expecting. The situation in Ukraine and Russia has only added to this, disrupting energy and food supplies, exacerbating what was already a delicate situation on the back of the COVID-19 pandemic.

Central banks, meanwhile, carried on raising rates during the month, with the Bank of England taking the Base Rate to 0.75%, and the US Federal Reserve finally entering the fray with its first quarter-point hike since 2018.

This has kept the downward pressure on government bond prices. Save for a brief interlude after the Ukraine invasion, these assets have had a terrible 2022 so far. UK gilts, which are usually held for defensive purposes, have fallen by more than 7% this year – illustrating how inflation really is their Achilles heel.

That said, and returning to the earlier thoughts about the Wisdom of Crowds, the last week of March did see “growth” equities rally hard (faster-growing businesses, most closely associated with tech firms of late). These parts of the stock market don’t typically respond well to inflation, and had endured a poor year up until last week. But do they know something we don’t? Could it be that, while inflation feels like it’s back with a vengeance, markets have sniffed out an end to the current surge, and a return to the lower-inflation conditions we saw for most of the last decade?

It’s impossible to say, particularly as other markets – government bonds – are simultaneously suggesting the opposite. So we continue to make sure your portfolios aren’t betting on one outcome over the other. Instead we remain, as before, positioned so that either outcome shouldn’t prove damaging to you in the long run.

*Jack Grealish is a fan favourite in the Manchester City and England football teams. For readers of different vintages and affiliations, you can replace his name with, among others, Cristiano Ronaldo, David Ginola, Paul Gascoigne, Maradona or George Best.

Simon Evan-Cook

(On Behalf of Raymond James, Barbican)

The Month In Markets – February

March 3, 2022March 3, 2022

The Month In Markets - February 2022

February will be remembered as a historic month, sadly for all the wrong reasons. The invasion of Ukraine by Russia towards the month end has severe implications, providing an uncomfortable reminder of the events that preceded the second world war. With lives at stake, it feels trite to write about finance right now, but that’s the purpose of this note, so I’ll run through some of the things that happened to markets over the month.

“Prediction is very difficult, especially if it’s about the future.” Niels Bohr, Nobel

I was pleased to be able to meet many of you earlier in February, albeit only virtually. I was even more pleased to hear Andy Triggs, Head of Investments at Raymond James, Barbican, say he wasn’t going to make any predictions about how the then-tense stand-off on the Ukrainian border would play out.

At the time, there were many grand, serious-sounding geopolitical strategists confidently claiming that Putin was bluffing. They are now busy washing their faces, while Andy’s remains reassuringly egg-free.

That’s one good reason not to make such predictions, and particularly not to invest off the back of them. Life is complex; things that shouldn’t happen frequently do. But he also set out another reason: Even if you’re right, markets often do the exact opposite to what you’d expect.

I talked about this in the December note: How markets can appear psychopathic, sometimes reacting positively to bad news. Those of you on the call will remember we ran through some geo-political events from the past, showing how the markets’ shock can be surprisingly short-lived. The instance that stands out for me, because I remember it well, was the day the second Gulf War began in 2003. Having fallen more-or-less constantly following the tech burst in 2000 and then the 9-11 attacks, markets actually rose that day, marking the start of a bull market (i.e. rising prices) that lasted four years.

And so it was in February. As you can see from the chart, European markets sold off on the 24th February, the first day of the invasion, but US markets rose and, by Monday, European markets were back where they started. It’s hard to know for certain why this happens, only to say that markets hate uncertainty (which is why they had been steadily falling for weeks) and Putin’s actions – unfortunately – ended any uncertainty about whether Russia would invade.

That’s not to say markets won’t yet begin to fall again. They’ve remained volatile into March, and no doubt will do so for some time to come. (Predicting that “markets will be volatile” is one of the few safe predictions in investing, which is why so many of us commentators predict it. It’s like telling people to “expect weather”). We’ve simply traded one uncertainty; will Russia invade Ukraine? for others; will Russia invade a NATO country? So this is very far from an all-clear on the investing front.

Another theme we’ve expounded on at length is inflation and its likely impact on interest rates. This is so important for your finances; almost everything else is noise, which is why we spend so much time on it. So in last month’s note we covered the rotation within markets: How everything that had performed well for the last ten years – when inflation was falling – had started to do badly, while everything that had done badly had started to perform well. And all because of inflation’s comeback tour.

Well, it’s all started to rotate back the other way again. And it’s due to what’s happening in Ukraine. You can see in the chart that government bonds (called gilts in the UK, and Treasuries in the US), which hate inflation, continued to fall in the first two weeks of February, but as invasion concerns mounted, they started to rally.

Partly this is because investors use these bonds as financial safe havens in times of stress, often selling riskier assets, like shares, in order to buy them. This pushes the prices of bonds up, and shares downwards.

But it’s also because investors are concerned that the war in Ukraine might lead to a slowing of economic activity, which means central banks are now less likely to raise interest rates to put the brakes on. This too is positive for bonds, but potentially bad news for shares.

Although, as always, it’s never quite as simple as that. Shares don’t like the fact that war might slow the economy, but they do like Central Banks’ responses. But what it has meant so far is that many of the parts of the stock market that had collapsed in January, most notably technology shares, have sprung back to life again. While some areas that had rallied, like European banks, have slumped. The rotation, in other words, is rotating.

But even that’s not that simple. Energy prices, which performed well in January, performed well in February too. So that part of the initial rotation continues. This is due to the threat of a cut in supply from Russia. This too then plays back into the inflation story, as higher energy costs feed into rising prices too. This potentially puts us on a path to stagflation – a grim combination of slowing economic growth and higher inflation. Hardly any assets like this scenario, and may explain why the rally in bond prices was somewhat muted given the severity of the news.

One set of assets that has, unsurprisingly, been walloped are Russian shares, bonds and the rouble. Sanctions, primarily those stopping Russia’s central bank from selling its piles of dollars and euros, have caused the rouble to collapse. Thankfully your portfolios have precious little exposure to anything Russian, so the direct effect of this to you is negligible.

Finally, as you can see from the chart, gold has been a useful investment for us this month. Gold can be a capricious beast. We hold it as insurance, but, like many insurance contracts, you can never be quite sure what it’ll pay out on until after the event. Thankfully, this event seems to be covered, and its rising price has helped your portfolio to weather this storm.

All this paints a highly confusing picture. We do not know how these events will play out – nobody does, and you should treat with caution anyone who claims they do. It’s no time for glib “I’m-sure-it’ll-all-be-fine” statements either – we’re as concerned about the world as I’m sure you are.

In the face of this, and in respect of your capital, we believe balance and diversification are the best options. Placing your assets into a single asset or market based on a prediction risks too much if that prediction proves wrong. And as events have shown, trying to predict the actions of a man like Putin is likely to end badly.

Simon Evan-Cook

(On Behalf of Raymond James, Barbican)

The Month In Markets – January

February 7, 2022February 7, 2022

The Month In Markets - January 2022

It’s been a white knuckle start to the year. As you can see from the chart, markets have plotted some dramatic courses, with global equities down by almost 8% at one point. But this picture plays down what’s been happening within markets: This is where the month’s real action happened.

We saw similar trends in December, albeit to a lesser degree. You’ll see them described as a ‘market rotation’ in the press. But what does that mean?

We’re used to hearing about stock market sell-offs and rallies, or bear and bull markets. These simply describe whether the market is falling or rising. A rotation refers to a change within the market and doesn’t imply that the whole market is moving in any particular direction. Instead, it means that one part of the market that was winning has started to lose, while another part that was lagging has taken the reins.

You could compare it to politics. The UK has continued to grow over the last 30 years, but every now and then its leadership changed – and not just the prime minister, the entire ideology underwent a seismic shift. Think of the landslide move from Conservatives to New Labour in 1997, or the crumbling of that movement and the return of the Conservatives in 2010.

We see similar shifts within markets too. In fact, when I look back on my career in the investment industry (26 years and counting – where did it all go?) stock markets, like politics, have see-sawed at least twice between different super-tanker themes and ideologies. We may now be experiencing another.

The first, in my career anyway, was the tech bubble of the late 90s. I remember getting caught up in the greed and excitement for the next big money-spinner, I’m just grateful I was only in charge of my own money at the time (of which there wasn’t much and, thankfully, I was too boringly conservative to consider borrowing to speculate).

Then came the rotation. Tech stocks and funds – good or bad – wobbled, collapsed, then flatlined for years. There were a few funds that had steadfastly resisted the urge to go all-in on tech (although many either folded, closed or sacked their managers), and these sailed serenely higher as the tech hoopla deflated. The whole experience made a big impression on me.

It’s easy to forget now, from our 2022 tech-tinted lenses, but technology stocks and funds became untouchable outcasts in the noughties. Sure; it wasn’t a great ten years for stock markets – the average global equity fund only made 6% – but it was truly dire for the once-mighty tech sector. The average tech fund lost 62% in that time*.

So, by 2010, having talked of nothing else just ten years earlier, very few people even mentioned tech investing, let alone bought technology-focused growth funds (and this is a couple of years after the launch of Apple’s world-changing iPhone). This silence and disinterest, so it turned out, was a fabulous buying opportunity.

The flipside of this trend has been energy and commodities. After a dismal 90s, these captured investors’ attention (and money) in the noughties as tech limped into the background. Now they were viewed as the chief beneficiaries of the era’s sexiest story: They would power the emergence and growth of China.

So as tech funds lost 62%, and the global stock struggled to a measly 6%, energy stocks rose by 90% in the noughties**. This meant that, while tech funds languished at the foot of the decade’s fund performance tables, the top was filled with energy and commodity specialists, or funds invested solely in energy-dominated markets, like Brazil or Russia. And, just as at the peak of the tech frenzy a decade before, investors could think of little else, and shovelled in more money expecting a repeat of the previous ten years’ stellar run.

Then came the rotation. Natural resource stocks and commodity prices wobbled, collapsed, then flatlined for years. While those funds that had resisted the urge to join the party (ironically, in many cases, by picking up unloved technology stocks) sailed serenely higher as the commodity hoopla deflated.

The next ten years painted a mirror image of the experience in the noughties: energy stocks lost 41% in that time, while tech funds wrestled back control of the narrative, producing 311% between 2010 and 2020.

So those are rotations. They’re not common, but they do happen. A changing of the guard that can turn successful strategies into failures overnight.

So are we seeing another regime change now?

Tech stocks, which have been in charge for more than a decade, have been wobbling for a while. But what we saw in January felt a little more like collapse. Most of the severe falls have so far been limited to smaller, more speculative stocks. But even some of the giants began to look vulnerable: Netflix, which put the ‘N’ in the ‘FAANGS’ acronym, fell by more than 28% over the month, having reported disappointing subscriber growth.

At the same time, energy companies fared well. Fuel prices are marching higher, while years of underinvestment mean new supply, which in previous years brought the price back down again, is scarce.

You can see this reflected in the earlier chart. The UK stock market has a large weighting in energy companies and hardly any exposure to tech shares – and it rose while other markets sold off. In contrast, the US has a far larger weighting to tech stocks, and it was walloped.

I’m wary here that I’ve made this sound too simple: If this is a rotation, why don’t we pull all your money out of the last decade’s winners and put it into its laggards?

One reason is because the ‘bait and switch’ of a long trend followed by rotation is just one of the markets’ regular tricks. Another is to present an apparently easy rule for making money (in this case simply switching horses every ten years), then whip it away at the exact point investors have figured it out.

So we shouldn’t be too quick to declare this a permanent rotation. The world is different now to when the tech bubble burst and energy stocks came to favour: Today central bankers seem more interested in keeping stock markets high; many tech firms are now quasi-monopolies, not flighty dotcom start-ups; and we have a far greater focus on using technology to move us permanently away from fossil fuels.

Indeed, as the month drew on, the rotation began to ebb, and fears over a war with Russia over Ukraine began to drive markets instead, dragging everything lower (you can see this on the chart when the UK and Europe start to play catch-down with the US).

This provided a timely reminder that balance is key. Just as we didn’t push all your money into one type of investment last decade, we’re not going to push it all into another for this one either. Diversification may reduce the chances of getting rich quick, but it’s the best way we know to avoid getting poor quickly, and that’s where our priority lies.

Simon Evan-Cook
(On Behalf of Raymond James, Barbican)

The Month In Markets – December 2021

January 10, 2022January 10, 2022

The Month In Markets - December 2021

December is often a good month for stock markets, with the so-called Santa Rally delivering presents to shareholders the world over. However, Asian shares must have made the naughty list this time, as another month of losses capped a poor year for these markets. But western markets took part, as investors looked beyond the Omicron fears that wobbled markets late in November.

This extended a puzzling theme we’ve seen for the whole of last year. Few will remember 2021 positively, as the flow of news has felt relentlessly grim. And yet most stock markets have risen: The UK market is up by almost 20% over the last 12 months; while the global average, driven by a heavy weighting in runaway US shares, made 23% (its third straight year of double-digit returns). How can this be?

This being the complex world of financial markets, there’s no simple answer to that. Instead, there are several answers. And any one of them, or some of them, or all of them, may be true.

One aspect of markets’ behaviour that befuddles investors is that they often react to future events, not to events that have just happened. This makes them seem psychopathic: Bad news hits the papers, perhaps confirming we’re in a nasty recession, then markets rise – apparently rubbing their hands in glee, like a pre-spirits Ebenezer Scrooge.

But what they’re actually doing is reacting to the likely reaction to that news. Most probably that this bad news means future good news: That central banks will, in response, put their foot on the monetary accelerator, which will lead to higher profits and growth further down the line. What can make this especially tricky is that sometimes markets react to the perceived reaction to the likely reaction to that news – and so on – often many times removed. This can make the whole experience like working in a Christopher Nolan movie.

So, one explanation for the weirdly cheerful tone of stock markets is that they’re looking beyond the bleakness, to some future sunlit upland. Perhaps – dare we dream it – a time when COVID is, if not gone, then relegated to the status of seasonal flu. This makes the stock market seem less like a psychopath, and more like a relentlessly cheery doctor. Which, if nothing else, is at least a nicer simile to contemplate so early in your new year.

Under this scenario, markets aren’t nuts. They’re correctly anticipating that companies will continue to do well in the future. Particularly that America’s tech giants will carry on hoovering up market share. These companies have, for the most part, had a cracking 2021 and, given their enormous size and influence on the global stock market, they account for a significant part of those gains.

Another popular explanation for the incongruously good performance is that, in contrast to the first explanation, investors have lost their marbles. Maybe lockdown has caused collectively delusional behaviour, driving us into a bubble the likes of which we last saw in 1999. Backers of this explanation present several exhibits, including historically high valuations, the mania for cryptocurrencies, and bizarre market shenanigans like last year’s GameStop episode. None of these are easily dismissed.

A third explanation – that’s not unrelated to the first two – is that it’s all down to the actions of central banks. For years they’ve been creating money and using it to buy financial assets, all in the hope that it will keep the economy rolling. And, in their defence, that’s essentially what the economy has done, albeit perhaps not as emphatically and evenly as many would have liked.

They took this to another level in response to the pandemic, creating trillions, then trying to inject it into the real world by buying financial assets. Actions like this led to fears of runaway inflation after the financial crisis of 2008 and are causing similar angst today.

But, as one theory goes, perhaps that money is failing to make it into the real world and is, instead, snagged in the not-quite-real world of financial markets. This would explain why real-world inflation hasn’t materialised, but in the financial world of shares, bonds and property, we’ve seen prices inflate dramatically.

And that brings us back to last month. A month in which not only did we see share-price inflation, but also faster real-world inflation, and at a far higher level than we’ve been used to over the last ten years. It was also, not coincidentally, a month in which the strongest sections of the market were those that had been the weakest over that same ten-year period.

I’ll put this another way: Many of the last decade’s winners were the losers in December, and that was due to concerns over rising inflation. Given the margin of their previous victory, that hardly matters. But if it’s a small victory that’s repeated, month after month, over the next decade, then a portfolio built solely of previous winners will perform poorly (just as a portfolio of last decade’s losers will if it isn’t).

This is the conundrum we wrestle with as we position your portfolio. We don’t try to precisely predict which way the world will turn – that’s a fool’s errand. Instead, we try to remain balanced, and therefore less vulnerable to a one-sided view proving the wrong one. In investing as in life, it’s best to focus first on survival, and that remains our priority with your capital.

Simon Evan-Cook

(On Behalf of Raymond James Barbican)

Risk warning: Opinions constitute our judgement as of this date and are subject to change without warning. With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. Raymond James Investment Services Ltd nor any connect company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this article. Past performance is not a reliable indicator of future results.