GLOBAL EQUITIES
It has been an eventful start to the new year. Many equity markets have continued to climb, some to new highs, but these moves conceal a lot that has been happening under the surface. Technology and other “growth style” sectors have come under pressure as bond yields have made a concerted move higher. Rate expectations appear to be increasing and investors have seen this as a reasonable indicator that those sectors which fall under the “value” style of investing should benefit. Banks and some other cyclicals have enjoyed a good run as a result, but it feels too early to bet in a big way that this trend will continue without interruption. If we are really going to see four rate rises from the Federal Reserve this year (and perhaps more according to some analysts), there are going to be significant challenges ahead for all markets and sectors and it is not as easy as simply moving away from those areas which have benefited most obviously from a zero-rate environment.
There is plenty happening away from the market rotation and monetary policy story. The energy crisis shows few signs of diminishing and there are now serious concerns about the affordability of oil and gas for domestic consumers, not least in the UK. The Russia-Ukraine situation is not showing signs of a resolution and an escalation of tensions could result in further energy price pressures which are clearly damaging on both the inflation and economic growth fronts. China continues to face difficulties both in its property sector and elsewhere in its economy with tension existing on multiple fronts with the US and European countries.
It is a complex and challenged backdrop, yet you would barely know it from the headline equity market movements. This has to cause some discomfort even amongst the most bullish investors who continue to look at bond yields and inflation and think there is really no alternative to equities. This feels like a mistake as monetary policy arguably reaches an inflection point and the right sort of fixed interest (and other diversifying asset classes) may yet prove to be invaluable in portfolios.
UK EQUITIES
We were not expecting the imminent departure of the Prime Minister despite the ongoing scandal over “Partygate”, but it now looks more plausible. In truth, leadership change (whenever it comes) will make little if any difference to investor perceptions of the UK. Uncertainty could of course affect the pound on a short-term basis but fundamentally there would probably be little fallout. Weakness in sterling would of course not do a great deal to assist in the fight against inflation, which is becoming more of a concern here as it is elsewhere. Inflation is running at a 30-year high and several rate rises now seem likely this year. There may be a transitory element, but all sectors are pushing inflation higher and further complications on the energy front could yet exacerbate the problems. Rising rate expectations globally could of course help UK equities to the degree that our headline index is relatively “value” focused from a style perspective. If investors flee tech and growth names in the US – the UK, with its greater constituency of energy, financials and industrials companies – might just attract interest. We are comfortable with our exposure to both domestic equities and the UK economy in general.
Investment Line is written and edited by members of the Mattioli Woods Group investment committee and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can go down as well as up, and you may not get back the amount invested. Past performance is not a guide to future returns.
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