2022 has started off as a challenging year for equity markets. Rising inflation concerns, soaring petrol prices and potential interest rate rises from central banks all contributed to what was a tough start to the year. The volatile markets felt some ease from a positive earning quarter, showing businesses were staying profitable in the uncertain times. However, this respite was short lived due to Putin’s invasion in Ukraine, bringing more distress to global markets. The conflict brought with it heightened oil prices and further supply chain concerns, though markets did begin to see some relief at the end of the quarter as peace talks continued.
2022 was primed to be the year of recovery, finally moving on from the restrictions imposed by the pandemic. The recovery brought with it rising demand for goods, which in turn resurfaced the supply chain issues brought about during COVID-19, raising prices further. It was originally hoped that inflationary pressures would be short lived, with supply chains normalising and excess demand fading as we move closer to normality. However, these hopes ended upon Russia’s invasion of Ukraine which caused a spike in oil prices, which subsequently filtered down through to a fuel crisis in the UK. The conflict also brings with it pressures on other areas of the supply chain, such as vegetable oils, which has also seen steep price rises and if the conflict continues, grain prices will also continue to rise – adding further inflationary pressure to the economy.
The chart above shows the performance of the world’s major indices over the past quarter to provide an indication of how global stock markets behaved. The geopolitical unrest we have found ourselves in since the year started, combined with concerns around central banks tightening policy was bound to cause volatility across global markets. The most noticeable market being Europe which clearly endured a sharp downturn around the time of Russia’s invasion on Ukraine. The Nikkei continues to struggle following on from a very volatile 2021. Asian and Emerging Markets are also displaying a similar message. The positive news is that the UK based FTSE All share was the only market to finish the quarter in positive territory, with the S&P 500, which experienced a very strong final quarter of 2021, falling just behind. Overall, markets continue to be affected by the ongoing inflationary pressures as well as concerns around policy tightening coming from central banks.
Central Bank Actions
The inflationary pressures and supply chain concerns we see within the economy all play into the volatile nature of markets investors are currently experiencing. This feeds into higher costs of production particularly within food and energy. Increased supply chain costs are passed onto consumers which would see higher household expenditure across the board. In the UK, consumers were initially shielded slightly from these higher prices due to the energy price cap, however as of the 1 April, energy prices saw a steep rise, though it is hoped that pairing this rise with the warmer seasons will soften the blow somewhat. This could however be short-lived as it is expected energy prices will experience another sharp increase in October, if wholesale prices do not start to moderate.
Inflation has been targeting at 2% for some time and Central banks continue to have this target in mind. However, inflation is currently well above these targets – The Retail Price Index (RPI) being 6.2% in March, central banks are being forced to intervene. Combatting inflation is done by central banks increasing interest rates, which is what we have seen begin to take place. The American central bank – The Federal reserve (Fed) raised the interest rate by 0.25%, something we haven’t seen since 2015 and the Bank of England (BoE) also raised its rate but by 0.50%. The European Central Bank (ECB) is also currently in the process of preparing to increase rates, which is expected to take place later in the year.
Raising interest rates to combat inflation is normal, however the issue which central banks are currently facing is that whilst the tools to raise rates are there to impact the higher demand we see, it will not do much in terms of easing the supply chain issues the world currently faces – which have been pushing inflation higher. Policy makers will need to remain mobile in implementing policy to ensure the actions do not end up causing additional economic pressure.
Francis Clark Financial Planning Portfolio Positioning
In the chart above we see the performance of our Francis Clark Financial Planning (FCFP) portfolios over the most recent quarter. The UK centric FTSE All Share performance is used as a point of familiar reference only. Being UK centric and 100% equity based, it is more volatile than our geographically diverse portfolios, which is demonstrated in the exaggerated movements seen in the FTSE in comparison to our portfolios. The portfolios show a less volatile journey in line with one another but still experiencing the same movements we see across all areas of the global market.
Longer Term Performance
To provide some context of longer-term performance, the chart above illustrates the performance of the FCFP portfolios since their inception in 2020 to the most recent quarter end. The portfolios now have just over 2 years of performance data in some of the most challenging market conditions we have seen.
FCFP Portfolios Are On-Track With Expectations
Despite the challenging environment we have found ourselves in for the past few months, the portfolios continue to behave in line with expectations, staying true to the original stated strategy of high quality, growth orientated businesses. Whilst this may show some negative returns in line with the market at times, we take comfort knowing our investment management partners do not feel forced to make any ‘knee jerk’ reactions, regardless of the way the market moves and instead stay true to the agreed mandate in line with our core views.
The FCFP portfolios continue to have a core focus toward high quality businesses. Our investment partners are closely monitoring the solution to ensure the strategies remain suitable for our clients.
We expect market volatility to continue, at least for the short term, as a result the Investment managers have reduced the total level of equity risk being adopted in the strategies and tilted the portfolios towards the ‘alternatives’ government debt exposure.
In the long run however, we continue to take a high conviction approach that it is the financially robust, high-quality companies which are best positioned to weather any upcoming market conditions.
Sustainability Remains Key
The portfolios continue to keep sustainability at their core, though the past few months have given us proof that sustainable investing indeed carries different characteristics and brings its own benefits and challenges in different market conditions. It is for this reason we continue to keep sustainability as a key consideration within the portfolios, but not at the expense of having a well-diversified suitable investment proposition for our clients.
Challenges Lie Ahead
With inflation continuing to rise faster than wages, it is expected that consumers’ ability to spend would be restricted, which could be enough to reduce demand. The Central Banks decision to raise interest rates makes it more difficult to borrow adding another layer of pressure on to the economy, which brings with it the risk of the economy dipping into a recession. A full-scale recession is not expected, though it is important that policy makers keep these risks in mind when implementing their next stages.
In the US, President Joe Biden announced that the US would release a million barrels of oil every day for 6 months from the strategic reserves, though this is only a short-term measure. Talks taking place with Iran could lead to a settlement, hopefully solving the oil crisis. The global supply of oil seems to be less of a concern as Russia is still supplying some countries with oil, doing so at a discounted rate. On the other hand, gas is far less mobile; an issue becoming increasingly problematic. Much of Europe remains heavily dependent on Russian gas despite this not being particularly desirable for those countries, moving away from dependence on Russian gas is a much tougher task than it may seem.
Coming out of a pandemic and moving into an economic environment laced with geopolitical uncertainty has its challenges. Facing supply chain issues and inflationary pressures at the same time is a challenge for investors, particularly in a higher inflation world.
At FCFP, we feel it is more important than ever to ensure your financial affairs are appropriately placed as we see ourselves in this challenging market. Our managers long term view remains the same – market volatility and economic pressure are expected to stay for the short term, though it is the high-quality companies with strong cash flows and balance sheets which will be the best place for investments as we move into the next phase of the investment cycle.
Author: Mashud Rahman (Investment Analyst)