It is just over 12 months since we last provided an investment update
The ongoing impact of Covid is still very much in play affecting both the real and investment world. In addition, the awful situation in Ukraine is now amplifying the effects of Covid.
There appear to be four different but connected issues affecting the global economy:
1. China’s growth prospects have been downgraded due to its strict Covid lockdown strategy.
2. The risk to the US economy, which has been booming, being eroded by the Federal Reserve’s monetary policy.
3. The effects on Europe of the cost-of-living crisis.
4. The real possibility of a food crisis and even famine in emerging markets.
The new major concern in the financial markets is inflation and monetary policy. This is particularly true in Europe with the additional concerns over fuel costs. Markets are consumed with what impact inflation will have on interest rates, company profitability, and consumer ability to afford goods and services.
Markets are grappling with how high and quickly will inflation grow and whether this is more of a short-term phenomenon or more long term.
So where are we?
From the start of 2022, there has been a large fall in the value of technology stocks and a reduction in the value of most fixed-interest investments. World equity markets are currently down almost 20% since the start of the year.
Particularly the US technology market has driven extremely high investment returns throughout the Covid crisis. This has resulted in many unprofitable or marginally profitable stocks being greatly overvalued when viewed from a post-Covid, post-lockdown society perspective.
As always, these market revaluations have the effect of reducing the value of some of the most profitable companies in the sector and, in this case, in the world, such as Apple, Alphabet (Google), Microsoft, and Amazon.
Fixed-interest investments have also been badly hit by the upward preserve of inflation and interest rates.
The winners have been the commodity companies including oil and gas. This is why the FTSE 100 index has held up relatively well against world markets. It has very few technology companies and a lot of large commodity companies. However, the problem with commodity companies is that they are incredibly volatile.
What is our advice?
Often the hard thing to do is to do nothing. I came across the following quote from Warren Buffet at a seminar earlier this month: “The stock market is a device for transferring money from the impatient to the patient.”
Your investments are all managed by highly respected firms with stable management and long-term track records of successful returns. The funds we select all have very clear investment strategies and transparent fees.
These investments will have provided good returns over the past few years up to the start of 2022. We are going through one of those periodic revaluations of markets and companies. Clients will have seen a fall in the value of their investments from the start of 2022. Most of our clients hold our investments through pensions and by their nature, these are long-term investments. It is always disappointing when investment values fall, this is however the nature of long-term investing.
What is important is that we are diligent in ensuring that our clients’ portfolios match their attitude to risk and that the investment funds remain high quality with long-term investment propositions. We are as confident as we can be that this is the case.
Good profitable well-run companies are still good companies even though their value has reduced. Clients also need to hold an element of fixed interest to balance their portfolio against their attitude to risk. Our investment panel is made up of two styles of investment funds. Low-cost passive funds, which track indices such as the Vanguard LifeStrategy funds, and actively managed equity funds which have very tight investment mandates. The Vanguard funds provide a Worldwide spread of equities and fixed interest with a bias towards the UK. The actively managed equity funds all concentrate on good quality profitable companies.
We are regularly reviewing our investment panel and funds and see no need to make any changes at present. This does not mean that we are in any way complacent. We take a lot of time to choose our fund managers and we keep them under regular review.
This year is proving to be difficult from an investment point of view and we would be delighted to speak with clients in greater detail about their situation.
We hope you find this update helpful and relevant.