“Howay the Ladds Monthly Spotlight” – March 2022

When I consider my relatively short time in managing money, one thing I have learnt is that every year there are challenges. 2022 is no different. Some of the concerns include inflation, central banks, a China slowdown, and Ukraine / Russia. In May we will be sending out our rebalance packs and in advance of this we wanted to share some thoughts.

March Spotlight

“Prices change when events are different from what the market has expected them to be.”

Peter Bernstein

We always urge a long-term perspective to investing. There is logic to this: a goal of 12-months is very different to that of ten-years plus. The reality is that all of us have multi-decade goals, the main difference is that we are likely to be at different points along that journey.

When we come to the re-balance, we follow a process. The main reason for changing a fund is if the performance has consistently dropped below what we would expect, and we can’t see a reason for this to change. Another example could be a change in fund management.

Sometimes, there are other factors where we must step back and challenge our thinking. As an example, in 2020 we had a few funds which dropped over 40% (they have since recovered) but we had to look at these strategies and ask whether this was expected.

To provide some colour to this; with one fund we were able to map out its future returns for the year and it ended up flat in 2020, even after falling nearly 40% at one point! Another, we looked at and although it has recovered, we felt that there was too much volatility to carry within the portfolios and this has now been removed.

In 2022 we face some interesting challenges. As the quote above hints, the market does not always apply logic.

I loved History at school and there are always geo-political issues to look at. If we study the Ukraine we will find that it is very complicated. There are breakaway states, and you have NATO slowly surrounding Russia. In theory, logic dictates that however horrible it seems, in time things will settle and so will markets. I could be wrong if Russia invades NATO states, but I am not convinced this will happen.

In terms of inflation, much of it is driven by goods and energy. Energy prices would need to double to create the same levels of inflation, and goods will have to be hampered by supply issues. Logically these are unlikely. So, in time these will drop back, and there is evidence that supply bottlenecks are easing. When you overlay this then it is sensible to assume inflation will settle around 3%.

I would add that with the current crisis in Ukraine, energy prices are rising and there could be increased supply issues so the speed with which inflation falls could slow.

Interest rates will go up and if they arrive at 2% in the UK, is that high when most people now have fix mortgage rates? I have heard some people argue that interest rates in the UK may settle at around 1% to 1.5%.

Then we turn to China and we are told there is a slowdown, but if they still grow at 4% or 5% that is significant. We must also remember that there is still a large part of the country that still needs to move to the “middle classes”. We read very negative articles in the UK about China but I would urge people to dig a little deeper.

The fact is that things happen, and markets worry because they focus on the short term. There is also an argument brewing that the next ten years will not be as easy as the last.

I disagree that the last ten years have been easy. Just look at 2011, 2015, 2016, 2018 and 2020. All these years had significant volatility.

So, where does that leave us with the rebalance?  I believe there is some truth to the argument that we will not see the same levels of stock market returns from the likes of Apple, Microsoft, Alphabet, Meta, Tesla etc. In fact, I wouldn’t be surprised if we saw sideways moves with some of these stocks but that doesn’t mean there are not opportunities.

Currently there is a cry that portfolios should be skewed towards “value”; these are parts of the market that are cheap. This includes energy and financials. Over history “value” has short bursts of outperformance and then drops back, so timing is essential and we are long term investors. However, “value” as a concept has changed and many managers I now speak to argue that there are good quality companies with plenty of cash who are unloved and can turn things around.

This year we have been grappling with this as our portfolios tend to be skewed to fund managers who invest in high quality growth companies. We believe these will be the long-term winners. Our view is that with all the noise we are best to wait, watch and research. This may mean that in 2023 we make changes in some areas, but we will not do this in 2022.

The two areas we have made some small changes in are UK and technology. In the UK we have used a passive strategy. Over the last three years we have identified two excellent fund managers who we believe have proven ability to outperform the index.

The second area is technology. We believe it has been right to hold a technology fund but now many of the holdings can be found across regional and global strategies. We are therefore phasing out holding a direct technology fund over the next couple of years and looking to add what we see as the next phase of technology.

Interconnected with technology is biotechnology, and we have made some changes around this to provide a more diversified investment universe.

In summary, the key takeaways are this. There are minimal changes in this rebalance. In terms of short-term noise, most of it will go away. We don’t pretend to know for sure but often when we listen to people and apply a sense of logic this tends to come true. We were slightly wrong with COVID but in terms of investments, 2020 and 2021 were very good years, so if there is some retraction in 2022, we shouldn’t panic.

Tracking the market

Markets have not responded well to the war between Russia and the Ukraine. We have seen a slight recovery in Bitcoin, and both Crude Oil and Gold are positive for the year. The FTSE 100 has also held up well this year.

1 January 2022 28 February 2022 Increase
Bitcoin USD 47,686.81 43,193.23 -9.42%
Crude Oil 76.08 100.99 +32.74%
S&P 500 4,796.56 4,373.94 -8.81%
Stoxx Index 489.99 453.11 -7.53%
FTSE 100 7,505.20 7,458.30 -0.62%
Gold 1,799.40 1,899.40 +5.56%
Hang Seng 23,374.75 22,713.02 -2.83%

Sources of data: CNBC, Yahoo Finance & Reuters

What is in, and what is out?

It is not surprising that energy and commodities dominate the top-ten performers over 12-months. The top three were iShares Oil and Gas Exploration and Production +65.90%, iShares S&P 500 Energy Sector +56.40% and BlackRock GF World Energy +50.40%.

At the bottom there are a mix of funds but four relate to Eastern Europe. The bottom three were Liontrust Russia -58.9%, Barings Eastern Europe Fund -43.70% and First Trust Dow Jones International Internet UCITS ETF -39.70%.

The data from the Investment Association is up to the end of December so we won’t start to see the impact from the Russia / Ukraine war for a couple of months. The largest outflow was UK All Companies -£781 million. Global Emerging Markets Bond was down -£259 million, UK Gilts -145 million and Sterling Corporate Bonds -£114 million.

Money markets were the main recipient of new money +£557 million. This might reflect a move to safety and it will be interesting to see if this increases over the coming months.

Net retail sales in December were £2,270 million, slightly lower than November. Interestingly the flow into responsible investments slowed in December to £1,200 million.

In summary, we can expect during this period for oil and commodity to be the main winners, and Emerging Europe to be the loser. At this stage it is difficult to get a pattern on where money will go but we suspect the data will show over the coming months a move towards safer assets.

Sources of data: TrustNet, Investment Association

Talking shop with fund managers

We have completed nearly 30 fund manager meetings this year and attended various updates on the global economy and sustainable investing. Below we share some thoughts from these meetings.

Interest rates and inflation

Allianz believe there will be five rate hikes in the US increasing rates to 2%. In the UK they believe this will go to 1.25% by quarter 3, but it could stop at 1% if inflation drops back and growth slows.

They also believe inflation is close to peaking. Oil would need to rise from $80 to $160 to get the same levels of inflation. In the UK they have modelled inflation on energy prices of $90 for oil and 250p natural gas and this would see inflation at around 3%.

They have also reflected that supply bottlenecks are easing which will naturally bring down inflation.

Market rotation

In a discussion with Montanaro they explained that January saw the biggest rotation to value in 15 years. This means that the gap between value and growth is starting to narrow. Other fund managers believe this may continue until the end of quarter 2 2022, when there will be a reverse away from value.

UK vs US

Aviva (and others) argue that many investors are overweight the US where they are further down the recovery line and facing stretched valuations. De Lisle believe that some large cap stocks in the US will move sideways over the coming decade.

The UK is misunderstood, with a focus on the FTSE100. However, the real opportunities lie lower down the market cap. Against the US, the UK is a region that many investors are underweight, valuations are at a significant discount and there are some fantastic international businesses.

There is a feeling that the UK could surprise investors positively over the next decade vs the US.

Capitalism and ESG

We pulled out some thoughts from Alquity on capitalism and ESG:

  1. Capitalism is a force for good but needs to change. Capital allocation shapes societies but there is an annual funding gap of $2.5 trillion to deliver a better society
  2. There is a wall of money moving towards ESG Funds and this trend will continue, especially from millennials
  3. The direction of travel is undeniable and relentless but there will be more regulation and focus to stop “greenwashing”. “Greenwashing” is making something look like something that it is not!

General disclaimer: The data has been sourced from external sources and although we have looked to ensure this is as accurate as possible, we are not responsible for data they supply. The view on markets is written in a personal capacity and reflects the view of the author. Equally the views under talking shop are those of individual fund managers. Individuals wishing to buy any product or service because of this blog must seek advice or carry out their own research before making any decision. The author will not be held liable for decisions made because of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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