This month, the experts pay special attention to oil and silver, along with the prospects for Asia, as they assess global economic and market conditions.
Expert investment views:
Investors are urged to focus on corporate and economic fundamentals to ride out the impact of a potential war-driven slowdown
The economic implications of oil supply issues are laid out, which might extend to a US and EU recession
An expert highlights the signals indicating that silver may be the precious metal to hold going forward
The case is made for strong performance from China – and greater Asia – this Year of the Tiger
Featuring this month’s experts:
1. Economic climate change
Russia’s invasion has thrown a wrench into the gears of the global economic recovery from COVID-19, at least in the short term. It threatens to disrupt global energy supplies, resulting in a rise in oil and gas prices, which will hit Europe hard and potentially ripple out across the global economy. This comes on top of the decline in market sentiment already evident in January and February, prompted by soaring inflation rates and the prospect of monetary tightening from central banks.
As things stand, the prospects for global growth remain positive, but the invasion of Ukraine poses increased risks to that view.
Our tactical allocation is evolving as asset prices move. Our allocation to equity has moved lower, while the rising gold price has increased the proportionate allocation to gold which has proven a successful haven in times of war and inflation. While we see no reason to accelerate this process for the time being, we are monitoring the ongoing situation carefully.
As things stand, the prospects for global growth remain positive, but the invasion of Ukraine poses increased risks to that view
Always remember that while geopolitical shocks can cause asset prices to swing significantly, they don’t tend to disrupt underlying trends in the long run.
We invest in high-quality and growth assets, while ensuring company valuations look reasonable given their medium-term prospects. We are confident that this approach makes sense over any reasonable time frame. While politics, policy and sentiment have regularly driven swings within asset markets over shorter periods, corporate and economic fundamentals have proven the most reliable driver of growth over time.
Partner and Portfolio Manager at James Hambro & Partners
2. The economic implications of what’s happening with oil
Although prices of oil pulled back slightly after climbing to price highs not seen since 2008, at the time of writing, the fallout from the Russia-Ukraine war seems likely to continue to cause economic issues.
Even before the conflict started, the price of oil was already rapidly on the rise as economies rebounded post the pandemic. It seems incredible that just two years ago, due to such low demand, oil prices were in negative territory, with West Texas Intermediate Crude (the US benchmark oil price) finishing at almost -US$38 a barrel on 20 April 2020. And while demand for oil is always volatile, the dramatic swings in pricing suggest we could be looking at supply shocks not seen since Saddam Hussein’s Iraqi army invaded Kuwait in 1990.
Oil is integral to economies beyond consumers given it’s needed to power factories and is used to make a vast plethora of products
More uncertainty is likely following the US announcement to stop all imports of Russian fossil fuel. Although the US’s consumption is relatively small – only about 8% of imports originate from Russia – it prompts more countries to consider bans. Europe has baulked (so far) given how heavily dependent it is on Russian oil – with multiple countries seeing 100% of their fuel needs supplied by Russia. The only outlier is the UK and even then oil imports will be allowed until the end of 2022. Fears of a consumer backlash, meanwhile, have stopped other purchases, following on from Shell’s decision. There is a growing armada of vessels full of unwanted Urals crude.
High oil prices are generally a bad thing for consumers. Whether filling our cars, firing up gas barbecues, decorating our homes or buying household goods, the price of oil makes a difference to the day-to-day cost of living. But oil is integral to economies beyond consumers given it’s needed to power factories and is used to make a vast plethora of products. A 2015 EU study showed that if oil prices decreased by 50%, up to three million additional jobs would be generated in the economic region, then 1.3% of the total labour force. More worryingly though is that high oil prices could lead to civil unrest. In 2018, the French gilets jaunes protests started due to the cost of petrol.
And while the true economic implications of oil supply issues may take months to unfold – and even be swallowed up by the accompanying issues for other commodities – it could be the trigger for an EU and US recession.
Investment Counsellor at Nedbank Private Wealth
3. All that glitters is… silver?
For many years a lucklustre performer, silver is beginning to catch our eye again. Could silver have a role in retail investment portfolios?
Russia’s invasion of Ukraine and growing inflationary pressures have caused many investors to seek portfolio protection in gold. The price briefly surpassed $2,000 an ounce in early March. For now, gold is fulfilling its role as a safe haven. But there may be another option available to investors seeking this sort of hedge, one rung down the ladder of preciousness.
Historically, silver has been considered the “poor man’s gold”. It has broadly followed the gold price up and down, often with a lag, and with more pronounced swings. Silver is a more volatile metal (in the investment sense) and is rightly treated with caution by retail investors. So why might silver be attractive today?
Silver has wider industrial application than gold. It is a better conductor than copper – and therefore a beneficiary of the trend in miniaturisation of electronic devices. Silver is an essential component of solar technology, microchips and electric vehicles. It’s sterile and inert, so is also used in a wide range of medical devices
Firstly, why not invest in silver? There are a few good reasons. Its volatility makes it difficult for professional commodities traders to get their timing right in the silver market. For retail investors, it’s close to impossible. A large proportion of silver is mined in politically unstable countries, notably Peru. In addition to environmental concerns, direct investment in undemocratic regimes poses a considerable challenge for responsible investors. Silver’s primary use for many years was in photographic film. This demand – now we’ve all got a digital camera in our pockets – has all but vanished.
But it’s the long-term reversal in structural demand for silver that has caught our eye.
Silver has wider industrial application than gold. It is a better conductor than copper – and therefore a beneficiary of the trend in miniaturisation of electronic devices. Silver is an essential component of solar technology, microchips and electric vehicles. It’s sterile and inert, so is also used in a wide range of medical devices.
We think we’re at the early stage of this trend in growing demand. Should it continue, a rising silver price may well provide investors real and valuable inflation protection – perhaps even more than gold.
Investment Manager at Ruffer LLP
4. Make Asia Great Again
After lagging the market last year, Emerging Asian stocks could benefit from investor rotation in 2022. At the heart of Asia is China, which is an important determinant of regional equity returns. Recent events show that Beijing appears to be changing direction, moving to stimulate the economy through looser lending conditions. This follows a Politburo meeting (comprising the most senior members of the Communist Party) in December, where the official summary readout focused on supporting growth and marks a contrast to a year ago when both regulation and credit were tightened.
For investors, an important fact to note is that China is now seeing faster credit growth, which could potentially lift private consumption. There is plenty of available demand
For investors, an important fact to note is that China is now seeing faster credit growth, which could potentially lift private consumption. There is plenty of available demand. HSBC estimates that China’s middle-class numbers around 340m people (larger than the entire US population) and is forecast to increase by over 45% by 2025 to more than 500m*. This expanding middle class provides support for China’s long-term economic growth.
Politically, there is also reason to juice up the economy ahead of China’s 20th National Party Congress in October, when President Xi is expected to be handed an unprecedented third term. With the Beijing Winter Olympics over, and providing the COVID outbreak remains contained, there is room for China to open its economy and for firms to deliver on company earnings expectations. China (and Asia) could well surprise investors in a positive way in the Year of the Tiger!
Source: “China in the Year of the Tiger”, February 2022, HSBC
Chief Investment Strategist at Smith & Williamson Investment Management LLP
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.