Market Update 14th January 2022
This week saw some calm restored to markets after a rocky start to the year. The shock announcement that the US Federal Reserve may accelerate tapering its balance sheet, sucking out some of the money it has pumped in over recent years, has worn off a bit. While there is plenty of uncertainty over whether it will follow through, especially if inflation starts to fall, the general feeling in the market persists; if money is no longer free you want to be careful what you spend it on. This is proving a drag on high tech firms with poor profits, and crypto currencies.
Elsewhere the scandal over Downing Street lockdown parties escalated as new damaging revelations were met by new, equally damaging, excuses. Johnson’s electoral success and personal appeal is wearing very thin as claims of “one rule for us and one rule for them” increase. Equally concerning is the timing. Someone has decided it’s time to get rid of Johnson and appears to be orchestrating the leaking of these events. Both are bad news for the Prime Minister and his popularity is tumbling hard as he has fallen 10 points behind in the opinion polls compared to Labour leader Keir Starmer, who’s approach appears to be to let the government just hang themselves.
As During the pandemic, the stocks of the digital revolution have become ever more prominent in world indices. The World Index reflects the dominance of the USA in the companies and sectors that figure most prominently. The surge in the US share of world markets has come in line with the rise of the US technology giants. The top ten companies in the world index are dominated by US corporations and they are mainly technology based. In the wider All World Index, which includes developing markets, the US internet leviathans are still prominent, though Taiwan semiconductor makes it into the top ten. TSMC is of course a leading supplier to the US industry.
A CHANGING PICTURE
Energy has shrunk to just 3.4% in the All World Index. This latter includes all the quoted oil and gas of the world which still powers and heats most things. It is curious that energy has fallen so low. Quoted property, mainly commercial, is just 2.7% of the advanced world index. That is also quite a low proportion. Utilities are at 2.7%. If you were to distinguish the main features of an advanced economy from a poor country you would probably instance the ready availability of affordable power for home heating, industrial process and transport through well connected pipe and delivery systems. You would probably add the availability of drinking quality water in taps in every home, and remember the much better average quality of property in an advanced country. These advantages no longer command much stock exchange premium for their delivery. Instead, the wish of the leading countries to end fossil fuels helps depress valuations.
The low level of property partly reflects the fact that much of it is owned directly and not through quoted companies. It also now reflects the Chinese wish to reform or bankrupt Chinese property companies. Valuations of advanced country shops and some offices have been adversely affected by the trends to more online retail and to more homeworking.
So, what has been winning? Information technology is now the largest sector at 24% of the World Index and the All World Index. Consumer discretionary is a little over 12 % of the World and All World, which now includes Amazon and others that are drivers of the digital revolution for consumers. Financials have kept second place at around 13%, slimmed down by the banking crash and then by the pandemic lockdowns and ultra-low interest rates. Healthcare has sustained a fairly strong position around 12%, helped by people living longer and needing more treatments in old age. Some have also benefitted from the big demand for pandemic vaccines. Communications, the sinews of the digital revolution, accounts for 8.4%.
If you look in more detail at the emerging world, that is now dominated by China at 30% of the emerging world index and Taiwan at 16%, with a tech savvy South Korea at 13%. Leading companies in that index include the Chinese digital giants alongside Taiwan semiconductor and Samsung with their big links into the western and US led digital world.
This illustrates that the world markets have all worked in harmony to promote and celebrate the success of the digital companies, and to downplay or downgrade traditional industry, energy and property. Just as US exceptionalism leads people to ask if the trend has gone far enough, contrarians will now be asking if they can find new trends and better value by betting against the technology dominance of recent years. It may well be that some of this works in 2022 as the digital companies fall back to more normal rates of growth after the extraordinary boost they received from lockdowns. However, the underlying trends of growth in social media, online retail, downloaded entertainment and remote working, alongside substantial data driven requirements from business, will continue, and underpin the advances these sectors have made in recent years.
IS PERFORMANCE LESS CONCENTRATED?
No sector or small group of companies survives indefinitely at the top. Some are brought down by bad management and arrogance. Some are cut back by government regulation and taxation. Some are simply overtaken by new technologies and ways of doing things, or new customer priorities as products and services evolve, or by newer and hungrier competitors. So far, the digital leaders have kept their intensity and their drive and have been able to attract many more customers and adapt their offering to provide a wider range of consumer satisfactions. 2022 is likely to see them still deliver well as other sectors seek to gain momentum from reduced controls on travel and social contact as they arise.
Much will rest on the progress of the virus, the continued pace of recovery and how the major Central Banks handle the significant rise in inflation we are experiencing. There will be plenty to advise and comment on as this new year of 2022 unfolds. We at Private Office Asset Management believe that there may be a bit more balance in sector performance than we have witnessed in the two Covid years which for very clear and obvious reasons played to the digital giants’ strengths, but the technology sector continues to demand our close attention, and we are advocating taking advantage of the recent sell off to now buy in at these numbers, having pared back during the last quarter of 2021 .
The Omicron variant continues to spread rapidly. The US reported the largest number of daily infections of Covid-19 since the pandemic began on Monday, 1.35 million. The previous record was 1.03 million cases on 3 January. A large number of cases are reported each Monday due to many states not reporting over the weekend. The seven-day average for new cases has tripled in two weeks to more than 700,000 new infections each day. The number of hospitalisations and deaths both jumped by more than a third in a week, but likely due to the Delta variant, not Omicron, according to Rochelle Walensky, head of the US Centers for Disease Control and Prevention (CDC), which is a very important point of note as we reported in last week’s newsletter the general acceptance that the Omicron variant appears in the main to pose significantly less of a mortality threat to those without existing serious underlying health issues
AUSTRALIA BATTLING RECORD INFECTIONS IN ITS EFFORT TO LIVE WITH THE VIRUS AFTER HIGHER VACCINATION RATES
The Omicron surge is threatening the Australian recovery as it too reported record infection rates. This week, the country’s total number of cases since the pandemic began surpassed one million, with more than half of these reported in the previous week. Aggressive lockdowns and tough border controls kept a lid on infections earlier in the pandemic (and they continue with these measures – just ask World Men’s Tennis number 1 Novak Djokovic), but Australia is now battling record infections in its effort to live with the virus after higher vaccination rates. Labour shortages and caution about being in public places have stifled household spending, banking group ANZ said in a research note, with spending in early January resembling lockdown conditions in Sydney and Melbourne. However, there are hopes that the number of cases could now start to level off.
The European Union’s drug regulator expressed doubts about the need for a fourth booster dose of a Covid-19 vaccine and said there is currently no data to support this approach.
The US Supreme Court blocked President Joe Biden’s Covid-19 vaccination-or-testing mandate for large businesses – a policy the conservative justices deemed an improper imposition on the lives and health of many Americans – but endorsed a separate federal vaccine requirement for healthcare facilities.
Official data showed that prices in the US were rising at their fastest rate in almost 40 years, with inflation up 7% year-on-year in December. This brought the US central bank’s next move into sharp focus.
In November, the UK surpassed its pre-Covid levels for the first time. Gross domestic product (GDP) expanded by 0.9% between October and November. That was higher than economists’ forecasts and meant the economy was 0.7% larger than in February 2020. However, growth is likely to have slowed in December due to measures introduced to control the spread of Omicron.
The travel industry will not recover for years, according to the boss of London’s Heathrow Airport. At least 600,000 passengers cancelled to fly from Heathrow last month as tougher travel restrictions were introduced to deal with the Omicron variant. Heathrow chief executive John Holland-Kaye said this underlined the crisis in the industry and the uncertainty facing travellers. “There are currently travel restrictions, such as testing, on all Heathrow routes – the aviation industry will only fully recover when these are all lifted and there is no risk that they will be reimposed at short notice, a situation which is likely to be years away,” Mr Holland-Kaye said. A return to normal “could be years away”, he warned, as he revealed passenger numbers at Britain’s busiest airport fell to a 50-year low in 2021.
South Korea’s central bank increased interest rates to the level it was before the pandemic, as it tries to contain rising inflation and soaring household debt. The Bank of Korea’s widely-expected decision to raise the rate to 1.25% was its third rate rise in six months.
USA: CONSUMER PRICE INFLATION AT 40 YEAR HIGH
The US Consumer Price Index reached 7% in December as the annual inflation rate hit its highest level since June 1982. Core inflation, which excludes food and energy, increased to 5.5% rising 0.6% compared to November. Data from the OECD showed inflation for member countries hit 5.8%, compared to 1.2% in November 2020, although the US was listed as the main contributor.
Hopes remain that inflation will prove transitory but the elevated figures increase the chance the Federal Reserve will soon start to raise interest rates and increase the speed of tapering. Goldman Sachs has predicted interest rates could be increased four times this year and comments from the Fed Chairman Jerome Powell suggest that the central bank is willing to raise interest rates more aggressively if necessary. Market reaction was muted initially, although tech stocks resumed their sell off on Thursday as the Nasdaq index fell almost 3% from its high earlier in the week while the 10-year Treasury yield rose to slightly to 1.74%. The fall in tech stocks has had a negative knock-on effect in many US funds that had previously benefitted from earlier and significant rises. Indeed, a top US fund that we are researching showed that across their top 10 holdings the average recent fall in value was (-6.7%). At this time we are considering buying into the market at these lower prices.
UK GDP: ABOVE PRE-PANDEMIC LEVEL
The ongoing recovery in the services sector has helped the UK economy to rise above its pre-pandemic level. GDP grew by 0.6% in November, the fastest rate since June, as strong construction output added to the recovery in services activity. Services, which make up around 80% of the UK economy, saw output grow by 0.7%. Manufacturing and construction grew at a faster rate as supply chain disruption eased.
Some of the largest growth was in consumer-facing services as output was boosted by considerably higher retail spending and increase in recreation and leisure. However, retail was one of the areas of the economy hardest hit by coronavirus restrictions and output remains around 5% lower than February 2020. The latest figures cover the period before the emergence of the Omicron variant of Covid-19, so GDP could see a reduction in December 2021 and the first quarter of 2022.
Soaring energy prices have been a major part of the recent increase in the cost of living – and the chief executive of British-Gas-owner Centrica does not see the situation easing in the short term. Chris O’Shea thinks high prices could last up to two years, and there was “no reason” to expect gas prices would come down “any time soon”. Mr O’Shea said hopes that average bills rising by more than 50% to about £2,000 a year would be short-lived may be “misplaced”.
UK EQUITIES: RETAILERS REPORT BETTER THAN EXPECTED SALES
The latest surge in coronavirus cases did not prevent many retailers recording strong sales over the Christmas period. The spread of the Omicron variant led to the reintroduction of some restrictions but speculation that this would deter shoppers appears overdone. This week sees strong updates from a number of retailers including Tesco, Sainsbury’s and Marks & Spencer. This follows a positive update from Next last week. Tesco and M&S have increased their expected profits, with M&S reporting sales almost 9% higher than 2019.
Figures from the British Retail Consortium show relatively strong retail spending as the recovery in high street sales continued. The BRC reported some disruption from rising Covid infections towards the end of the month but overall retail sales were 2% higher than 2020. However, not all retailers shared in the recovery. Curry’s PC World said supply chain disruption reduced overall sales, while Halfords said sales were almost 3% below 2019 levels.
REQUIRE A SOLUTION TO INFLATION DIMINISHING THE VALUE OF YOUR CASH ON DEPOSIT BY 6% PER ANNUM?
TASK US ABOUT OUR PROPRIETARY ‘BESPOKE ALTERNATIVE TO CASH PORTFOLIOS’
The rapid, and very significant rise in inflation has brought into sharp focus the serious depreciation in the value of their capital held in cash with deposit taking institutions that savers are now faced with. For a saver with £500,000 sitting in cash on deposit, attracting 0.50% per annum interest at a time when annual inflation is running at 6.50%, means that at the end of 24 months the real value of that £500,000 will reduce to £440,000 – a real loss in value of (-£60,000) over the 2 year period.
As an alternative to large cash holdings sitting on deposit losing tens of thousands of pounds in real value each year due to inflation, speak to us about the Private Office Asset Management “Bespoke Alternative to Cash Portfolios” where we work with each individual client on a highly personalised managed advisory basis to out together a tight, low volatility portfolio of assets specifically targeted at delivering a net of performance return to protect the real capital value of their money. A typical specific benchmark to target would be CPI + 1% which, if achieved, would, based on the same scenario above for an investment of £500,000 provide a return a 2% net uplift in the real value of your capital after 2 years at £510,000 real value as opposed to a real return of £440,000.
Returns are not guaranteed, and as values may fall as well as rise you may not get back all of the money you invest, but our track record in advising on such targeted portfolios is reliably and consistently ahead of these targets, as many of our existing clients will testify to. We can happily provide anonymised examples of real investment returns over the past 1, 3 and 5 years upon request for our bespoke alternative to cash portfolios.
Please ask us for details.
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