Expert investment views:
Investors are reminded to seek out investment opportunities as markets “climb the wall of worry”
The recent outperformance of UK equities is held up as an object lesson in the importance of diversification
The case is made for continuing to hold shipping industry securities amid choppy investment waters
Featuring this month’s experts:
1. Opportunities arise as markets climb the wall of worry
To say this quarter has been momentous for geopolitical events, as well as markets, is an understatement. This followed a period of some of the strongest returns ever in equity markets. From the bottom in March 2020, equity markets had almost doubled in value to the end of 2021. A correction would have been on the cards anyway, but it ended up being more than that. The Ukrainian conflict and rising inflation have had a major impact.
Inflation had already raised its head, spurred on by supply chain issues, compounded by rents and wages starting their ascent. But the Ukraine war has not only exacted a terrible toll on life – it has damaged financial markets. Central banks could not wait for the resolution of events in Ukraine and have started a potentially long cycle of interest rate hikes – markets expect eight this year from the Fed.
It is likely this situation will weigh on the global economy. And the longer inflation stays high, the harder it will be to bring it to central banks’ target of 2%
Commodities are the main beneficiaries of this situation, with energy, metals and agricultural products as sanctions on Russia and the interruption of Ukrainian crop exports curtail supplies.
It is likely this situation will weigh on the global economy. And the longer inflation stays high, the harder it will be to bring it to central banks’ target of 2%. Will we reach those 1970s levels of stagflation that many are anticipating? We don’t think that applies quite yet. And for equity markets, corporate earnings so far seem unaffected by inflation, as companies can pass on higher costs as increased prices to customers.
There is no doubt these are uncertain times for investors. But opportunities arise as markets climb the wall of worry.
Chief Investment Officer at Canaccord Genuity Wealth Management
2. That was the quarter that was: UK equities
Whilst looking forward at what we expect markets to do is generally more helpful, reflecting on the quarter just passed can be worthwhile, especially during times of volatility.
In the three months to end of March the FTSE 100 has returned around 5%. In comparison, global equities were down around 5% and the Eurozone equity market was down around 9%.
So, what’s driven the UK’s outperformance year to date? Predominantly it’s the sector mix.
The experience of the first quarter serves as a reminder that global diversification is an important way to manage risks and volatility, and that once volatility peaks, equities often provide positive returns in the following 3-6 months that exceed those in less turbulent times
The best performing sectors so far have been materials, which have returned 27% in the UK, and energy, which has returned 26%. The UK has a higher-than-average exposure to these two sectors in the MSCI UK. And comparatively the worst performing sector has been technology, which is only around 1% of the MSCI UK market cap weightings.
Although, it’s not all good news for the MSCI UK. Financials, which are the second largest weighting, have returned a more middling 3%. Consumer staples, which are the largest sector in the MSCI UK index at an 18% weighting, have returned -3% year to date. This is due to their interest rate sensitivity and in some cases their higher-than-average exposure to Russia and Ukraine end markets.
It’s been an uncertain year so far in financial markets, and whilst some equity markets are still down year to date, they have rebounded significantly from their lows in mid-March.
The experience of the first quarter serves as a reminder that global diversification is an important way to manage risks and volatility, and that once volatility peaks, equities often provide positive returns in the following 3-6 months that exceed those in less turbulent times.
UK Chief Investment Officer at UBS Global Wealth Management
3. How shipping is faring amid choppy investment waters
My first article for findaWEALTHMANAGER two years ago was on shipping, noting the likely increase in shipping rates driven by the emissions legislative need to slow container ships, the global shortage of ships and shipyards, and the likely turning of a decades-long cycle.
Since then, shipping rates have doubled and doubled again as supply chains jammed, steel prices rocketed, and as predicted there were too few ships and shipyards to respond to the global need. It’s nice to be right once in a while.
The skies are darkening for the consumer economy, and that is rarely good for such a globalised industry as shipping, however we need to balance this against the ongoing tightness in the market
The question now is “what next?” Our investments have made good money, having simultaneously produced a decent yield (Tufton Oceanic, or SHIP, produces a 5.8% yield as of 06/04). The skies are darkening for the consumer economy, and that is rarely good for such a globalised industry as shipping, however we need to balance this against the ongoing tightness in the market.
My Bloomberg tracker of shipping values continues to make new highs, and I would contend that the issues I wrote about two years ago have not gone away. “Negative charter value”, which basically means old ship rental contracts with poor rates rolling off and new lease contracts at excellent rates being established, are an ongoing tailwind. As such, I expect net asset values to continue to rise in the short term, although the picture could look less rosy as we work towards the end of the year and into 2023.
In conclusion, take some profits, but remain invested.
Private Clients Investment Director at Tyndall Investment Management
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.