The Week In Markets – 19th March – 25th March

March 25, 2022March 25, 2022

It has been a while since we covered the UK in detail in a weekly note, but with inflation data, the Spring Statement and retail sales data all being delivered this week, the UK deserves some bandwidth.

The Spring Statement took centre stage on Wednesday, and the pressure on Rishi Sunak increased with the release of inflation data on Wednesday morning, which came in at 6.2%, the highest level in 30 years and ahead of expectations of 5.9%. The Spring Statement, in truth, did not provide too many surprises and the immediate effect on UK markets was muted. At an economic level, growth was downgraded from 6% for 2022 to 3.8%. While this growth level is still above trend, the impacts of inflation and Russia-Ukraine are expected to negatively impact growth. Data on Friday highlighted that the UK consumer may already be feeling the effect of higher prices, with retail sales falling 0.3% month-on-month and consumer confidence falling to the lowest levels since November 2020. We’ve frequently highlighted that UK equities have traded on a discount to their developed peers since 2016 (Brexit) and one likely outcome of this would be increased M&A activity. After lots of corporate activity last year, we saw Brookfield, a Canadian asset manager emerge as a potential bidder for Homeserve this week. Homeserve shares rose around 15% on the speculation.

European Composite Purchasing Managers’ Index (PMI), which is seen as a useful measurement of economic health, slipped slightly from the previous month, however, was still above expectations and showed the area was still in expansion territory. Digging a little deeper into the data, it appeared that supply issues continued to deteriorate, which could impact future European growth.

The US economy delivered mixed messages this week. Services and Manufacturing PMIs rebounded from last month and came in well ahead of expectations, however this was offset by declining durable goods orders and US business investment falling for the first time in a year. The data potentially highlights that the US economy may be slowing, which could lead investors to question whether the US Fed can be as aggressive in their planned interest rate hikes.

Unfortunately, there appeared little advance in any peace talks between Russia and Ukraine this week with the conflict continuing, deepening the humanitarian crisis. US President Biden was in Europe this week for talks with allies, and said that Nato would respond if Russia escalated to using chemical weapons in Ukraine. The West also promised more aid for Ukraine and increased sanctions on Russia once again, but stopped short of sanctioning Russian gas supplies into Europe. Many European nations rely heavily on Russian gas and the Belgian Prime Minister this week summed up the difficulties they are facing by saying “We are not at war with ourselves. Sanctions must always have a much bigger impact on the Russian side than on ours”.

Equity markets have in general continued to advance this week, despite what feels like an uneasy economic backdrop. At a stock level Apple recorded its eighth consecutive day of rising on Thursday as the tech heavy Nasdaq index rose nearly 2%. The S&P 500 has advanced in six of the last eight trading days as investors have begun to buy the dip following the sharp declines in markets earlier in the year. The recent success in equities has not spilt over into bond markets however, with developed government bond yields continuing to push higher this week. Continued hawkish language from the US Fed has led the market to now price in an additional 7 rate hikes (of 0.25%) for 2022.

Despite the sell-off in government bond yields, we continue to see merits in maintaining small allocations in portfolios for diversification benefits. Our view is that if we are to enter choppy waters ahead, these assets have the potential to perform well, and would likely offset some of the volatility we would see in equity markets. At some point we may even consider adding to these positions if prices continue to fall, as we are in effect buying portfolio insurance at a cheaper price, with a higher potential future payoff.

Andy Triggs | Head of Investments, Raymond James, Barbican

Risk 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.

The Week In Markets – 12th March – 18th March

March 18, 2022March 18, 2022

There are times when content for the weekly note can be hard to find. There are other times when the challenge seems to be finding a way to squeeze in all the key points into just a few short paragraphs that can be easily digested on a Friday afternoon. This is definitely one of those busy weeks with subjects such as Russia’s invasion of Ukraine, US and UK interest rate rises and China’s market intervention all needing to be discussed.

While the Russian invasion of Ukraine has continued, with strikes seemingly intensifying, there have been reports of a softening stance towards negotiations and the hope is that some sort of agreement can be reached in the near-term. These rumours of a potential agreement supported European equities, with the Euro Stoxx index up nearly 5% over the course of the week. UK markets were also once again strong this week, with the more domestically focused FTSE 250 index rising around 3.5% since Monday. The oil price has remained volatile throughout the week, at one point falling below $100 a barrel, but rising again on Thursday and Friday.

The US Fed raised interest rates for the first time since 2018, nudging base rates up by 0.25% to 0.5%. Given the recent strength of the US economy, coupled with inflation running at 7.9% currently, it’s staggering to believe policy has been so accommodative. The market, and indeed US Fed, believe they will need to continue to raise rates throughout the year in an effort to combat inflation and excess growth. However, economists have this week downgraded US growth expectations for 2022 and there is a risk of policy error here; that the US Fed raise interest rates too quickly into what is a slowing economy. On the back of the rate hike and hawkish language from Fed chair Powell US government bond yields rose, with the 10-year treasury hitting 2.2%, a post-COVID high. The Bank of England (BoE) followed suit on Thursday, increasing UK interest rates from 0.5% to 0.75%. The BoE struck a much more dovish tone, acknowledging that inflation is likely to be higher in the short-term due to the invasion of Ukraine, but that higher energy prices would be a drag on growth to net energy importing countries, such as the UK. The expectation now is the BoE may be slightly more cautious in raising rates going forward.

Chinese equities came under intense selling pressure early in the week as investors questioned whether China’s links to Russia could lead to Chinese sanctions. This was on top of concerns around regulation and the Chinese property market and was enough to trigger Beijing to intervene. The state council vowed to keep capital markets stable, support overseas stock listings, handle risks for property developers and said regulation for the technology sector would soon end. The news sent Chinese stocks higher, with the Hang Seng Tech Index up an incredible 14% on Wednesday. China and US tensions continue to be a little strained, so all eyes will be on the call between US President Biden and Chinese President Xi Jingping later this afternoon, the first time the two will have spoken since Russia’s invasion.

What appears like a challenging week has actually been positive for global equities, with most major indices advancing throughout the week, and this has fed through to our portfolios. Bond markets have remained challenged with inflationary pressures negatively impacting prices.

Next week’s note is likely to be a busy one once again; Rishi Sunak is due to deliver the Spring Statement on Wednesday, with energy prices and the National Insurance increase in focus. At a portfolio level we will try to assess the longer-term implications of any announcements, instead of trying to make short-term bets, which are often driven by luck as opposed to skill and notoriously hard to get right consistently.

Andy Triggs | Head of Investments, Raymond James, Barbican

The Week In Markets – 5 March – 11 March

March 11, 2022March 11, 2022

The last seven days have felt like a rollercoaster in markets with big daily moves in asset prices and volatility remaining high throughout the week. The constant newsflow and short-term noise can prove slightly overwhelming at times like this and frankly it can be unconstructive to making sound long-term investment decisions. We have focused our efforts in recent days and weeks on meeting with or speaking to the underlying fund managers in the portfolios, as opposed to simply relying on BBC news, to get a better understanding of how the current global backdrop is impacting holdings.

At a market level we witnessed big moves in oil markets with the US banning Russian oil imports and the UK stating that they would phase out of Russian oil by year end. At one point on Tuesday, we saw Brent Crude momentarily touch $139 a barrel before falling heavily on Wednesday and is now currently at around $112 a barrel. Prices at the petrol pumps hit all-time highs this week and this will act as a pinch to the consumer. The higher prices are in effect a windfall for the UK government given the level of fuel duties. It will be interesting to see if there are any reductions to these duties to support consumers.

Gold was once again an asset in demand this week as prices rose through $2,000 an ounce on geopolitical and inflationary fears. At times it can be a frustrating asset to hold, but we continue to see the merits in holding this real asset that offers good portfolio diversification and has returned circa 10% this calendar year.

It was not all doom and gloom in equity markets this week. On Wednesday European equities were in favour with the German equity index rising a staggering 7.9% in a day. The UK and wider global equities all participated in this relief rally too, which appeared to be driven in part by the rumours that Zelensky may be willing to agree to certain Russian demands. It’s a reminder of how quickly things can change and highlights the risk of being out of markets. Positive UK data, which showed the economy emerged strongly from the Omicron variant in January, boosted UK equities on Friday; the FTSE 250 index is now on course for its best week in a year, albeit after falling heavily last week. The strong data may encourage the Bank of England to once again raise interest rates when they meet next week.

US inflation came in at a new 40 year high of 7.9% on Thursday, which was in line with consensus. The expectation is that inflation will continue to rise in the coming months as rising oil and commodity prices feed into the data. With the US Fed also meeting next week, many are expecting to see their first interest rate rise of this current cycle.

As mentioned in the first paragraph we have been meeting with a lot of fund managers recently and will continue to over the coming weeks. There were some interesting takeaways; a global equity manager said that their portfolio was flagging the highest upside to fair-value since August 2020. A UK equity fund manager said that they had personally invested in their own fund this week, acknowledging that they didn’t know if this was the bottom, but it provided a good entry point on a medium-term time horizon. We were also reminded of the embedded inflation protection built into some of our infrastructure and real asset holdings. We will continue to carry out this exercise and focus on making sure we are partnered with talented fund managers and diversify across asset class, investment style and geography.

Andy Triggs | Head of Investments, Raymond James, Barbican

The Week In Markets – 26 February – 4 March

March 4, 2022March 4, 2022

This has been another tough week on a humanitarian front, and we want to continue to extend our thoughts and best wishes to everyone impacted by the Ukraine crisis. The purpose of the weekly note, as always, is to report on financial markets, which too have endured a difficult end to the week.

This week has seen heightened volatility across most asset classes as markets attempt to price in a prolonged Russian invasion and the associated risks this would create. As Simon Evan-Cook alluded to in yesterday’s monthly note, uncertainty is something that markets dislike, and uncertainty has increased over the last few trading days.

Safe-haven assets have generally rallied this week, albeit, with bumps along the way. At the start of the week, we witnessed significant falls in developed government bond yields (prices rise). The likely driver of this is the expectation of slower economic growth, which could deter central banks’ from raising interest rates at an aggressive pace. However, it is still likely that the US Fed will raise interest rates by 0.25% this month. Fed chair, Jay Powell, spoke to the House of Financial Services Committee and clearly showed his support for a modest interest rate rise in March to help curb inflation, while acknowledging it was too early to determine the economic impact of Russia’s invasion of Ukraine.

While government bonds and gold responded to the escalating conflict by rallying, equity markets hit more turbulent times, with big falls on Thursday and Friday (at the time of writing). French president, Macron, spoke with Putin for 90 minutes, with little success and it became clear a resolution was not close and there could be worse to come. While the sell-off has been broad-based, European equities have generally fared worse than US equities, which is a clear reversal from the trend in January and February this year.

The commodities sector looks poised to finish the week with its biggest weekly gain since the 1960’s. Brent crude oil briefly touched $119 a barrel this week, the highest level since May 2012. European and British gas prices pushed higher with the benchmark Dutch gas price hitting new all-time highs. Rising oil and gas prices will hit the consumer hard which will be a drag on economic growth and is something we need to pay attention to. Consumer balance sheets are generally robust given the ability of many to deleverage and save during COVID-induced lockdowns, however, higher energy prices could see this trend reverse. It wasn’t just oil and gas rising this week, copper hit a new all-time high while wheat prices have risen nearly 75% in 2022. Ukraine and Russia are two of the major exporters of wheat globally and their supply is likely to fall significantly.

As is customary for the first Friday of the month, US Non-Farm Payroll data was released. This is normally a key focus of the market; however, it has been left in the shadows by the geopolitical concerns. The data was very strong, showing 678,000 jobs had been added to the economy against the consensus of 400,000 and the unemployment rate fell to 3.8%. These numbers highlight the underlying strength of the US economy at present and will likely encourage the US Fed to raise rates later in March.

The backdrop of a Russia war makes it uncomfortable to be invested currently and will stir up a range of emotions for investors. While the cause of the concern is different this time, many of the emotions people are feeling will be similar to the initial COVID-19 crisis in March 2020, a period where uncertainty engulfed markets and assets sold off indiscriminately. With hindsight this was the opportune moment to actually be increasing risk. While we don’t want to take undue risks in portfolios, it can be helpful to look back to other crisis moments in history.

Andy Triggs | Head of Investments, 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)

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.

Citizen of the World

March 3, 2022March 3, 2022

Events in Eastern Europe over the last week have correctly dominated TV, radio, newspaper and online news. It also meant that almost all equity or bond investors made losses during February, many for the second consecutive month unless – like the U.K. equity market – there was high proportional exposure to commodity sector shares.

The Week In Markets – 19 February – 25 February

February 25, 2022February 25, 2022

Many of our readers will no doubt be aware that this week has been historic for all the wrong reasons, with Russia invading Ukraine. We know it is a difficult time and our thoughts are with those people affected by these events.

Focusing on the impact on markets, we have seen big swings in global equities this week. It’s worth remembering that equity markets are typically forward-looking, and the potential geopolitical risks were in part already discounted into prices. However, it appears that the full invasion witnessed towards the end of the week was not ‘in the price’ and we saw European and Asian markets fall heavily on Thursday. The US equity market, after opening in the red, staged a remarkable comeback and actually ended the day up, with the S&P 500 closing 1.5% higher. Japanese equities rose by a similar amount overnight and UK and European equities are in positive territory today at the time of writing. At this stage, it’s not 100% clear what the endgame will be, and with that uncertainty still lingering, there is potential for asset prices to remain volatile in the short term.

Safe-haven assets have responded to the turmoil, with prices generally rising this week. Within bond markets, investors are beginning to question whether central banks will be able to raise interest rates as aggressively as expected, into what could be a slowing global economy. Other safe-havens such as gold and the US dollar also performed well. It’s a timely reminder of their insurance like characteristics and it is why they are held in our clients’ portfolios.

The oil price broke through $100 a barrel, climbing to eight-year highs on concerns around global supply. Russia produces around 11 million barrels of oil a day, much of which is exported, and this supply could be impacted if Western sanctions escalate. European natural gas prices also spiked; Russia currently supplies around 35% of Europe’s natural gas and again this supply could become strained. Rising commodity prices will do little to soothe concerns about inflation, although it should be remembered that higher energy prices act as a quasi-tax on the consumer and could have the effect of dampening demand for goods and services and this is deflationary.

There was some positive economic data released this week, although clearly this has been overshadowed by Russia’s invasion of Ukraine. Services and manufacturing PMI data for the UK came in ahead of consensus and US GDP for Q4 2021 was revised higher to 7%.

Periods, like we are going through now, are highly emotive and it can feel very difficult to be invested in asset markets. History has repeatedly shown us that these uncomfortable moments are often also opportunities, especially for investors with a long-term time horizon, who can look through the short-term headwinds. At an investment committee level, we try to do this in an objective, structured way to ensure we are making appropriate long-term decisions for the portfolios.

Andy Triggs | Head of Investments, Raymond James, Barbican

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.

The Week In Markets – 12 February – 18 February

February 18, 2022February 18, 2022

With Storm Eunice arriving today, preventative measures have been taken to minimise damage, with schools shutting, transport networks closing, and people being advised to stay indoors. The word “storm” is used frequently when describing the weather, but the classification of a storm is when the wind is measuring 10 or above on the Beaufort Scale (55mph or higher).

This week’s weather system seems to have reflected the current mood in markets. It’s been unpredictable and varied, with moments of sunshine, but as we head towards the end of the week there is potentially worse to come.

Geopolitical tensions have continued to dominate newsflow this week. On Tuesday there were reports of troop withdrawals from Russia, however, these claims were denied by NATO who stated this was not being witnessed on the ground. Risk assets (equities) advanced on hopes of a diplomatic solution to the crisis, and then fell away again as tensions seemed to escalate. Throughout the week both the US and UK have held regular briefings and shared a lot of intelligence with the media and public. It is seen as a clear strategy to try and remove the element of surprise from Putin and helps them control the informational war. While equities have been choppy, safe-haven assets such as gold have performed strongly. The precious metal price topped $1,900 per ounce on Thursday, which was an eight-month high. Government bond yields have fallen from recent highs in another indication that safe-haven assets are in favour this week.

Defensive positioning was reflected in this month’s Bank of America investor survey, which showed cash allocations at the highest level since May 2020. Interestingly, this is used by some as a contrarian indicator, and they will see high cash allocations as a clear buy signal.

Inflation concerns continued to rumble away with the latest UK CPI number coming in at 5.5%, a 30-year high, with items such as clothing and footwear seeing big jumps in prices. Over in the US, the Fed’s meeting minutes were published and the language was less hawkish than feared. The US consumer, despite seeing their cost of living being squeezed, provided some positive news this week with US retail sales coming in at 3.8% (month-on-month), considerably ahead of expectations.

The Office for National Statistics (ONS) UK House Price Index showed price increases of 10.8% for 2021, putting the average price of a UK home at £275,000. London has been a laggard compared to other UK regions, as people left the city and opted for more space as work from home policies were put in place. However, there are reports of a ‘boomerang effect’ occurring with young workers flooding back to London given offices are re-opening and COVID measures are being removed.

Markets, in general, have been stormy in 2022, facing wind and rain in the form of inflation and geopolitical risks. The key questions remain about how long these forces will persist, and what impact they will cause should they strike. Forecasting is a notoriously tough thing to do accurately and as such our focus remains on diversification in portfolios to avoid some of the worst weather conditions, while also being able to make hay when the sun shines again.

Andy Triggs | Head of Investments, Raymond James, Barbican

The Week In Markets – 5 February – 11 February

February 11, 2022February 11, 2022

If one was to google the year 1982 a few things would likely appear; the birth of Prince William, the Falklands War or Liverpool winning the league. What most won’t know about 1982 is that US inflation was 7.5% that year and, until this week, had never been reached again.

The headlines on Thursday were dominated by US inflation, which came in ahead of expectations, at 7.5%, a 40-year high. Shelter, energy costs and used cars were some of the key drivers of inflation – used car prices are now a staggering 40% higher than they were 12 months ago. The data added to the expectation of US interest rate rises, which was further fuelled by comments from St. Louis Federal Reserve President James Bullard who called for a 1% hike in rates by July. The market reacted immediately yesterday, with US equities snapping a strong two-day winning streak to end down on the day, led by the more growth-orientated equities. The trend of rising bond yields (and therefore falling prices) accelerated, with the US 10-year Treasury bond rising through 2% for the first time since 2019.

Staying with the 7.5% figure, the UK economy grew at 7.5% in 2021, the fastest pace since World War II. It’s worth remembering that 2020 was a year where the economy collapsed by nearly 10%, and so a strong rebound was expected. A UK survey showed that starting salaries rose in January by their third-highest rate on record, as workers are demanding higher wages to compensate for the increased cost of living. The Bank of England Governor, Andrew Bailey, made himself unpopular with comments suggesting workers should be restrained in pay expectations in an effort to stop wage inflation spiralling out of control.

We haven’t written about COVID-19 for a while, and this week Boris Johnson suggested that all COVID measures could be scrapped at the end of the month, nearly two years after the initial lockdown in March 2020. Some suggested this was an attempt to deflect away from “partygate” and indeed there were rumours that the top UK scientists had felt blindsided by the news.

Russia-Ukraine tensions appear to have moved up another notch this week, with Russia carrying out military drills with Belarus. Boris Johnson also commented that the crisis has now entered its “most dangerous moment”. Oil prices have remained high on the fears of future supply issues.

At an asset market level, many of the equity indices have partially recovered from recent lows around 24 January. However, the bond markets have continued to drift lower on the back of expectations of robust global growth and higher inflation in the year ahead. At the moment the market narrative is completely focused on inflation, and I’m sure it was similar in 1982. Who would have thought the next 40 years would see negative interest rates, deflationary pressures and falling bond yields.

Andy Triggs | Head of Investments, 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)