Posted 4th October 2021
Markets in review:
|Equities||Index Level||YTD Change|
|MSCI – Europe||150||13.5%|
|Shanghai Composite (China)||3,568||2.7%|
|Brent Oil Futures||79.28||53.1%|
* Figures as at 1st October 2021
DPM in review:
- The latest UK GDP figures showed the growth rate stalling in July, with just a 0.1% rise. This figure was lower than previous expectations for a 0.6% rise. It looks like the initial Covid re-opening ‘bounce’ may have run its course for now. Inflation hit 3.2% in the 12 months to August, up from 2.0% in July. The 1.2% increase is the largest monthly increase since records began in 1997. The Bank of England kept interest rates on hold at 0.1% in September, with all members voting unanimously on the decision.
- The UK Prime Minister Boris Johnson announced a 1.25% increase to National Insurance contributions for both employers and employees as well as applying the 1.25% rise to dividend income. The increase will raise £36 billion which will be used to fund the Government’s ‘Social Care Plan.’
- In the US, jobs figures disappointed with an increase of just 235,000 compared to the 720,000 that was forecast. The pressure is now on the head of the US central bank, Jerome Powell, to continue with stimulus programmes until such time as the employment target is achieved. However, with the US Federal Reserve expecting the inflation rate to rise to 4.2% this year, the choice to continue with stimulus measures may not be so straightforward.
- ‘The lady isn’t for tapering’, said the head of the European Central Bank, Christine Lagarde, as bank officials voted to keep European stimulus policies unchanged whilst slightly moderating the pace of its asset purchases.
- The headline rate of inflation within the Eurozone reached 3.0% in August – the highest level seen since 2011.
- Chinese property behemoth Evergrande suffered a collapse in its share price as the world’s most indebted developer, with liabilities in excess of $300 billion, struggled to meet interest payments on loans due to a cash flow crisis. The debate over whether this is China’s “Lehman moment” continues, but the effects are already being felt in stock markets around the world.
DPM in action:
Inflation, supply chain issues, soaring energy prices and rising interest rates all add to the ever-increasing anxiety that investors are facing at this current juncture in time. With all the present noise, it can become hard to see past the headline grabbing risks and to forget the fundamental underlying reasons for investment. Psychologically, humans are risk averse and this has served us well during the centuries, but no great feats were ever achieved without an often-calculated element of risk taking. Investing in shares, for example, affords individuals the opportunity to participate in the success of the companies they own through dividend payments and share price appreciation. However it also provides the platform to ensure the next generation of innovative companies have the capital that they require to fund breakthroughs that the entire world may benefit from. The rewards of long-term investing cannot be understated and those willing to ride out the volatility and ignore the short-term noise are thoroughly rewarded for doing so. To quote the words of the “Sage of Omaha”, Warren Buffet, ‘the stock market is a device for transferring money from the impatient to the patient’.
During September we saw stock markets around the globe beginning to see increased levels of volatility. As one example, the S&P 500 index finished trading around 5% lower than its value at the start of the month, as investors began to get nervous of lofty valuation levels, hints of a reduction to the quantitative easing stimulus measures and also the prospect of perhaps sooner than anticipated interest rate rises.
In a “lower for longer” interest rate environment, businesses have enjoyed the ability to borrow money to invest at record low rates. This has helped to drive growth and earnings, which in turn has led to increased cash flow levels and conversely higher share prices.
In some cases, valuations have run away with themselves and may now begin to see challenges as higher borrowing costs have the effect of reducing the level of available cash for reinvestment or distribution to shareholders. This in turn can knock confidence and lead to falls in share prices as valuations reset to match the new adjusted earnings outlook.
But why are central banks talking about raising interest rates at a time when the world is still recovering from the pandemic? Well, the answer is simple – inflation. With a global supply chain shortage fuelled by Covid backlogs, shortages of raw materials and shipping issues to name just a few, the price of everything seems to be rising. These issues, now coupled with the onset of an apparent energy crisis, driving up the price of natural gas tenfold in the UK alone, are adding fuel to the inflationary fire. One way to dampen down the effect is by raising interest rates as this tends to reduce demand and conversely bring about a stabilisation in prices. The interest rate hikes perhaps required may however be larger and swifter than first anticipated.
During September, the investment committee decided to increase the levels of cash within our clients’ portfolios. We specifically removed exposure from the more interest rate sensitive funds in the equity space, such as those angled more towards technology and innovation. This was done as any reduction in share prices will likely hit the hardest here due to the rapid appreciation in said prices over the past few years, where the multiples of earnings that these businesses are priced on start to look unsustainable. By holding an increased level of cash in these volatile times allows us to achieve attractive market entry points if, as we anticipate, prices retreat somewhat.
As stated above, it is likely that volatility will increase during the rest of the year throughout all asset classes. However it is in these times that utilising the Laver Wealth Discretionary Portfolio Management service can really pay dividends for investors. By employing strict investment criteria and focusing on good quality businesses with strong balance sheets, we ensure our clients’ portfolios are in the best possible position to navigate any investment related headwinds. We are able to make changes rapidly as and when opportunities arise but to also be proactive when more defensive actions are required. Our clients can be assured that we continually have our hands on the scales, tilted in their favour.