Key Points.
- Underlying concerns rumble on as the war continues to rage in Ukraine, sanctions against Russia continuing to put upward pressure on oil and gas prices which are affecting the cost-of-living.
- Incessant negativity proves detrimental for equities and markets remain volatile.
- The short-term outlook remains clouded, but there are signs that inflation is peaking in some areas.
- We come into the second half of 2022 fully invested in equities as we position portfolios for a rebound in markets, with a balance between value and growth and an emphasis on quality.
- The consequences of the war in Ukraine will remain with us for some time but we are positioned to take advantage of the eventual global recovery.
What has happened over the last 3 months…
June kicked off with positive headlines dominated by the Jubilee events that saw the whole country come together in celebration of the Queen’s landmark 70-year reign. However, as we all enjoyed the extended bank holiday, underlying concerns rumbled on as the war in Ukraine continued to rage, now focused on the eastern Donbas region, with no signs of abating. The ongoing sanctions against Russia continued to put upward pressure on oil and gas prices that has really started to filter through to the costs-of-living, which are rising at a significant pace. In the face of such inflationary pressures, central banks remain committed to the hawkish path of higher interest rates and policies to unwind the money printing that had come to dominate western economies over the last ten years.
Market reaction during the month of June…
The incessant negativity through June was detrimental to equities, as market volatility remained elevated investors remained cautious, given the ongoing inflationary environment and the acceptance of higher interest rates. Over the period the FTSE 100 was down 5.76% and up 1.8% over 12 months. In sterling terms, the more technology biased US S&P 500 index fell 4.93% over the month and was up 0.20% over 12 months. In Sterling terms, the global FTSE All World Equity Index was down 5.10% over the month and down 5.57% over the 12-month period.
Where are we now…
The short term outlook remains clouded; however, we are beginning to see some positive signs that inflation might be peaking in some areas. Consumers are beginning to rein in their spending, retailers have over built their inventories resulting in a glut of products that will end up on sale, a deflationary force. The Chinese economy is beginning to reopen, slowly unclogging global supply chains, key commodities have begun to fall including copper, lumber, and iron ore, which helps apply some additional deflationary forces to the equation. Nevertheless, despite these glimmers of hope, the process of reducing inflation whilst avoiding a recession will take time, and we will likely need to become accustomed to a higher natural rate of inflation than we have been used to over the last couple of decades.
How we have been managing bespoke portfolios through June…
During the month we bought Intermediate Capital Group (ICG) across portfolios, a FTSE 100 alternative asset management firm with a 30 year track record across multiple cycles. The company has a global footprint, specializing in private equity, private debt, real assets and credit. Investment at the ICG company level provides investors exposure to a firm that is well positioned to grow and benefit from the medium to long term opportunities these niche markets offer during such volatile times. The shares are trading at an excellent valuation with a dividend yield of rough 5.5% at the time of purchase.
Current portfolio positioning and the outlook…
We come into the second half of 2022 fully invested in equities as we position portfolios for a rebound in markets, with a balance between value and growth as well as a focus on quality. Whilst it is impossible to call a bottom in the markets, we believe that a lot of negativity has already been priced in and should we see additional progress in areas such as the Chinese reopening, signs that Ukraine conflict is on course towards resolution and a dampening of consumer demand, then we expect markets to react very positively. In the event of a sharp market rally, we plan to let client portfolio equity allocations run to higher levels than normal so that portfolios can fully participate in the rally without having to make forced sales. We will of course, manage this top end equity exposure very carefully with regular assessments of the allocation levels, to ensure the risk levels are suitably monitored.
Final thoughts…
The first half of 2022 has been a challenge for investors as the world, post pandemic proved to be vastly different to the world, pre-pandemic. The anticipated supply chain issues and the spike in demand was on the radar, however, the Russian invasion of Ukraine has proven to be the game changer that could not have been anticipated, and the effects of which will remain with us for some time to come in the form of energy and food inflation. We believe that the current positioning of portfolios is strong for the medium to long term time horizon, as we look to take advantage of the eventual global recovery.
Important Information
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and the value of an investment, and any income from it, may go down as well as up and the investor may not get back the original amount invested.
