MONTHLY UPDATE: FINANCIAL MARKETS STILL NAVIGATING VOLATILE CONDITIONS
IN A NUTSHELL
The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.
POSITIONING OUR CLIENTS’ INVESTMENTS
Our relative bond positioning has helped cushion our portfolios and funds somewhat from the falls in bond markets. In particular, we have a reduced allocation to investment grade corporate bonds (which have struggled), and our active position in Chinese bonds has held up.
Our exposure to the healthcare sector has performed relatively well. These investments have outperformed other more volatile parts of the market, and we believe this sector is better supported in the current environment.
We recently bought more UK stocks and reduced exposure to growth style equities. For years we have held a comparatively large number of UK equities, and the market’s higher exposure to inflation-linked sectors like energy, and defensive sectors like healthcare, is proving beneficial. Growth stocks, meanwhile, like technology, have struggled.
We have an unusual situation right now where economic growth is slowing while inflation is rising – usually rising prices are a sign of a strengthening economy. At some point something’s got to give. Either inflation will peak, reducing pressure on central banks to raise interest rates, or economic growth will slow so much central banks won’t want to raise them anyway, preferring instead to stimulate their economies. We still expect inflation in the US to fall over the second half of 2022, but markets are likely to stay volatile in the meantime. UK inflation looks set to remain high for most of the year, and the Bank of England has become more outspoken about the challenges this may present to UK consumers.
The Bank of England recently issued a stark, although very speculative, warning about the UK economy, saying it could shrink rather than grow in the last three months of this year. But the country’s international stock market is driven by different, less domestic factors – as are the large companies we mostly invest in. We’ve believed for some time that the UK economy was at risk of economic slow-down this year, and have reduced our exposure to smaller companies which are more vulnerable to this.
China’s zero covid policy is dragging down economic activity, but the authorities there appear committed to supporting a steady pace of growth – be it through direct financial support for its people or moves to stimulate broader economic expansion. Its central bank recently announced a spate of measures, which include urging more lending to people with “flexible employment”, such as taxi drivers and online shop-owners, and providing longer-term, cheaper loans to small businesses.