Global Markets
Things continue to be challenging for investors. Just as some sort of progress looks like it is being made on inflation, we have an unwanted rise in oil prices. The reasons behind the move are many and varied but the Saudi/Russia supply cuts, long term lack of investment in the space and the ongoing strength in global demand are all conspiring to send prices higher. This really does throw a spanner in the works of central banks as their primary tool to combat inflation, namely interest rate hikes, are not really effective against these sort of acute supply side shocks. It comes at a time when the economic data suggest slowing economies pretty much across the globe and investors are therefore forced to entertain the idea that we face a stagflationary scenario. Optimists will hope this can be avoided, and we had better hope they are right as very few assets perform well in that sort of environment, other than maybe gold. The developments are certainly likely to strengthen the resolve of central banks who will want to look tough by reiterating the mantra of ‘higher for longer’ though with the European Central Bank (ECB) having moved rates to 4% and the Federal Reserve and the Bank of England comfortably over 5% already, we struggle to see too many more hikes. Remember, the longer rates stay high the more debt that has to be refinanced at higher prices and the more the economy will face headwinds. Even the mighty US economy, sustained so far by its labour market and resilient consumer, is starting to show signs of strain as the interest rate rises work their way through the system – credit card debt and bankruptcies are rising and there is the feeling that a recession looks more as if it has been delayed rather than avoided. This means things are going to be less than straightforward for investors for the foreseeable future. Investors will continue to pin their hopes on rate cuts but the odds of them transpiring any time soon look to be dwindling and equity markets usually bottom in the middle of recession not before. Against this backdrop we maintain our focus on quality and assets which can protect while also participating in the growth that is achievable in this environment. This means using an energy allocation in some of the portfolios to both take advantage of the long-term structural oil and gas story and provide some hedge against the inflation coming from short term price moves.
UK equities
The arguments for the UK market have been known for some time. Often investors just stress that it is cheap. Very cheap. What then is the catalyst for its fortunes improving cry the opposing voices? Assets can be cheap for a long time before any latent value is realised and waiting has an opportunity cost when other assets can be owned in the meantime. The UK market, certainly at the large cap end, features a lot of companies which are in out of favour industries such as mining and financials and there is basically no exposure to investors’ beloved technology. Recently, UK businesses are even choosing to list overseas rather than here. Then, we have long standing productivity issues and a more stubborn inflation problem than in many countries. All these concerns are valid and worth expressing but given the headwinds for the global economy, we think very attractively priced larger names in the UK are worth having in portfolios. Income looks as if it will be increasingly important in a world of weaker growth and the UK provides this aspect of return better than most peers. We have as many concerns over the UK economy as most, but large and mid-cap names here derive the majority of their earnings from overseas and can even hedge domestic difficulties for investors via weaker sterling and its impact on their overseas earnings. Maybe, just maybe, a change in government could also attract some overseas investors who have frankly grown tired of recent administrations. Headwinds persist here for sure but when you survey the globe for assets which are priced in a way which truly reflect the outlook for the global economy, even the cheaper ones do not really convince entirely. The UK comes closest, with great potential.
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Investment Line is written and edited by Chief Investment Officer Simon Gibson and Investment Strategist Richard Smith 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.
All content correct at time of writing.
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