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Monthly Notes

The Month In Markets – May

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

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.

The Month In Markets – April

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

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.

The Month In Markets – March

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)

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

The Month In Markets – February

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)

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.

The Month In Markets – January

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*.

*Source: Morningstar. As measured by the Investment Association’s sector averages; IA Global and IA Technology and Technology Innovations. **Source Morningstar. The S&P GSCI Energy Index

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.

*Source: Morningstar. As measured by the Investment Association’s sector averages; IA Global and IA Technology and Technology Innovations. **Source Morningstar. The S&P GSCI Energy Index

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)

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.

The Month In Markets – December 2021

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. 

Chart-Dec-2021

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.

The Month In Markets – November 2021

The Month In Markets - November 2021

We were on course for a decent November until Covid released Omicron; its latest update. Unsurprisingly, this caused stock markets to sell off, with money flowing into government bonds – which are perceived as a safe haven – instead. These movements, particularly the reactions from individual stocks and industries, provided an unwelcome reminder of the shock conditions we experienced in the first wave of Covid last year.

At the market level, it’s obvious why markets should take this news badly: If this variant were to resend us to square one in our fight against Covid, the return to rolling lockdowns would apply a heavy brake to economic activity and corporate profits. However, there are many unknowns about Omicron, which perhaps explains why the sell-off we’ve seen so far hasn’t been too severe.

These unknowns range from the grim back-to-square-one scenario outlined above, through the more neutral outcome of this variant being controllable through existing vaccines, to an outright positive result; that this more virulent strain turns out to be far less harmful than earlier variants. Positive because, as it passes through the population, it might act like a natural vaccine, giving us immunity against its more harmful predecessors. If this were the case, you could even imagine authorities compelling us to go out in the world to mix with other people. Good news for restaurants, nightclubs and cruise liners.

That last line hints at some of the market sub-trends that were revived this month. In our world of investing, never a day goes by without some comment on the tug-of-war between ‘value’ and ‘growth’. You’ll certainly hear us mention them in meetings with you, so a quick run-through might help.

The following is oversimplified to the point of being wrong, but to briefly explain: ‘Value’ is an investment approach that means buying companies that have become unpopular with the market, but the value investor thinks all that is about to change. If they’re right, share prices will bounce as the companies recover, or the market starts to like them again.

‘Growth’, in contrast, means buying a company that’s already growing its profits well, but that its proponents think will grow faster or further than others currently expect.

These two groups of stocks tend to move in herds, and each herd can have short, medium or long periods when it’s trouncing the other. Before the financial crisis, with a notable interlude for the late-nineties tech bubble, value had the upper hand. But the last decade was all about growth stocks: they consistently won.

And that was before the first Covid outbreak, which allowed growth to kick value when it was already lying prostrate on the canvas. The reason? The kind of out-of-favour stocks ‘value’ investors like had become cheap because they were mostly physical-world companies like retailers, airlines or oil companies. These had already been comprehensively outpaced by growth stocks, among which tech companies like Google, Facebook and Amazon were the obvious leaders.

So when Covid struck, forcing us off the roads and out of shops and airports, most value stocks took another hammering. While the fact we were all forced to spend more time in the digital world and had to do even more of our shopping online, gave ‘growthy’ tech companies a huge, unexpected windfall.

However, like a phoenix from the ashes (or a zombie from the grave, depending on which camp you’re in) value stocks were resurrected last November: The news of successful vaccine trials heralded the start of our return to the physical world, sparking a rally in value stocks that lasted for months.

It’s been a more even contest of late though, and although markets have generally continued to rise, they’ve see-sawed between value or growth along the way. However, this month, Omicron, and with it the threat of a return to lockdowns, hit value stocks hard again, while growth stocks held up better.

Until, that is, two days later, when the US Federal Reserve waded into the fray. Its chairman, Jerome Powell, stated their intention to taper the Fed’s Quantitative Easing (QE) program more swiftly than previously indicated. For reasons too lengthy to explain here, growth stocks have loved QE. As such, news that it’ll be disappearing more quickly was bad news for them. So, while the first leg down of the market on the 26th (see chart) was driven by value stocks, the second downdraft on the 30th (which carried on into December) was led by growth stocks.

So what we have here, in the space of just a week, is a microcosm of the big, conflicting forces that have been driving markets for years, and will likely continue to do so for some time to come. These really matter for the path of future returns generated by different investments, and therefore your wealth.

This is why we spend so long obsessing over them. Almost all of the assets that have performed well over the last decade have done so because they were well suited to the conditions we saw: Falling inflation, rolling QE and a movement-restricting pandemic. And because those assets have made great returns, it’s all too tempting to stick most of your money into them, as they look great on a glossy chart.

But clearly what matters now is the next decade, not the last one. And should that involve the opposite conditions: Rising inflation; an end to QE (then rising interest rates); and release from lockdowns, then there’s a good chance many of those winning assets will turn to losers (and vice versa).

The obvious solution is to work out what’s going to happen, and invest accordingly. But like many obvious solutions, it has a killer flaw: It requires a giant slice of luck, without which it’s impossible to forecast what economies and markets are going to do. And mistakenly believing you can predict them almost always ends in tears.

The honest and pragmatic answer is to stay well balanced. You’ll have heard us referring to both the growth and the value funds we hold. Our aim is to pick the best of both and therefore stay well clear of the worst of either.

This is a topic we’ll return to in future notes: It’s important that you understand our approach here. Our philosophy is that to aim for a good result with no risk of ruin is preferable to a stunning outcome achieved only by risking it all. Knowing you as we do, we think this is the right path to travel.

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.

The Month In Markets – October 2021

October can be a stormy month for markets, but not this year: Global equities strolled to a 4% return in a calm and orderly fashion. In the absence of headline-grabbing tempests to describe then, I’ll instead use the month’s movements to set out one of the two key debates that currently vex us as we discuss and shape your portfolio.

If those two debates had titles, they’d be: “Stock Markets: Take the Money and Run?”; and “Inflation Vs Deflation”.

We’ll look at the first this month. Stock markets have had a cracking October, that much is clear. Making 4% while your bank account pays nothing is a great result. And it’s not just this month. So far in 2021 global markets have made nearly 20%. Extend that to two years, to now include the worst global pandemic since the Spanish Flu of 1918, the same markets have returned a head-scratching 38%. While if you’d invested ten years back (no mean feat, as back then the world was fretting over the eurozone crisis), you’d be sitting on a return of 261% today.

These are exciting numbers. But we’ve all been around too long, and been to too many parties, to assume we can enjoy that much gain without real-life dishing out some pain to balance things out. In investing terms, this instinctively makes us want to take profits and (in theory) reduce risk by cutting your exposure to equities, and adding more to defensive assets, such as cash or bonds.

And yet we haven’t. Not yet, anyway. We’ve actually been having the exact same debate for the entire (admittedly short) life of the branch; for all that time markets have been sat atop incredible gains (albeit marginally less incredible than today’s). But we decided, thankfully, to stay put. Why?

I think it helps to compare how different this decision is today to 15 years ago. If you’d have had this uneasy, vertiginous feeling at the tail end of 2006, you would still have faced a tricky choice, but then the only cost of running to cash was the cost of a missed opportunity.

The world has changed: in 2006 there were decent, obvious, and risk-free alternatives to shares – most obviously cash (Icelandic banks aside). If you’d have sold your equities and kept the cash, you still would have earned interest of around 5% (unimaginable today, but that was the UK’s base rate as 2006 ended).  At the same time, the UK’s inflation rate (CPI) was only 1.6%. So, very roughly, even if equities continued to rise (which, for at least another six months, they did), your wealth would, based on those numbers, still grow by about 3.4% per year (interest less inflation).

Now compare that to today. The base rate is 0.1%, which is basically nothing. So that decision to switch to cash, had you made it last month, would have meant you missing out on the equivalent of 40 years of interest, which is what global equities made in October.

Furthermore, the latest CPI number was 2.9%. So you can assume that, instead of growing, your cash-based wealth has actually shrunk by about 2.8% over the last year (interest less inflation again). And, as long as inflation remains higher than interest rates, it will continue to shrink too. Just as it would have done for the lion’s share of the last 13 years, during which time inflation was persistently higher than interest rates.

This is why we don’t take this decision lightly. Much as our conservative instincts make us cautious after a long rally, we’re also wary that putting you into cash today could be a trap: that we’d be condemning you to an uncomfortable spell on the sidelines, watching as the spending power of that cash ebbs while the value of other assets – that you no longer hold – rises.

Against this, however, is the truth that, much as we think equities are the best place to invest over the long term, they offer no guarantee, much less comfort, that they won’t stumble along the way.

2020 illustrated this rock-and-a-hard-place problem neatly. Take yourself back to the start of that pandemic-ridden year. If two advisers had approached you, one predicting markets would crash by more than 25% within the next 12 months, while the other forecasts a total return of +12% for the year; which one should you have gone with?

Well, they were both right: markets plummeted by 26% in March as lockdowns took hold, but by the end of the year they had more than recovered, finishing with a return of 12%. (The actual answer to that question, though, is you shouldn’t have chosen either of them: if any adviser tells you precisely what the next year will hold, you should run like the wind. But that’s another story.)

That, in a nutshell, is the conundrum we face today. We all agree that – over the long term – equities offer not just the best opportunity to beat inflation, but to actually grow the spending power of your wealth too. But, in the short term, they are susceptible to lurching and entirely unpredictable drops in price, which will put you through the emotional wringer (something we are obviously keen for you to avoid).

But we can also all see that, while many of the classical ‘safe-haven’ assets, like cash or bonds, might protect you from massive waves in the short term, over the longer term they put you at serious risk of slowly sinking, as your wealth’s spending power is eaten away by inflation.

It’s our job to balance those considerations, and with them your portfolio. It’s no use us putting you in the best returning investment over the next 10 years if the ride is so unbearably rough that you abandon ship along the way (that’s the last of the nautical metaphors, I promise). In doing our job we consider and balance many factors, such as the valuations of different asset classes and the wider economic and social environment, and then marry those to your own personal need for returns and appetite for risk.

So that’s what we’ll continue to do. After a bumper month like October, you can assume we’re more likely to reduce risk than add to it. But it’s a team decision, and it’s never as simple as “markets have gone up, so sell”. That would be too easy: markets, like life, aren’t that kind.

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.

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