David Wheildon / February 2022
Are we entering the beginning of the end of the Covid 19 pandemic? – the question that vexes us all. The NHS is under great stress but seems to be coping and the Covid/Omicron levels are now falling which should begin to ease the pressure on the health service in due course.
It is very, very early to say this but markets are beginning to think that the Omicron variant is an example of how Covid will mutate further into a highly transmissible but generally less severe version of itself. In the very long run we might even end up calling it flu. It is as if the global economy has had to fight for the right to party during the pandemic and, on the assumption that we will learn to live with a weaker version, markets are moving to a more traditional view of the economic outlook.
On this basis fears about inflation, the general tightening of money supply and tax rises have been coming to the fore. Allied to the potential of political uncertainty we have seen a degree of market volatility in recent weeks and in the short term expect this to continue. As the focus turns away from the Covid pandemic and back towards how the global economy interacts in its search for profit in a world of rising prices, it is inevitable that we see volatility, which must be ridden through rather than reacted to.
There are real difficulties ahead in the short term and the effect of rising prices is not going to help. Consumers in the UK are seeing general commodity price rises whilst also coming to terms with an increase in National Insurance payments from April which, allied to the effect of dramatic rises in the costs of fuel is taking disposable income away from consumers. The forced reduction in disposable income has the same effect on the consumer as raising interest rates – nonetheless there is an expectation of further rises in UK interest rates this year.
The global economy cannot live with high inflation for any extended period of time and one way or another it must be brought under control; if Central Banks are lucky the price rises will do their work for them but if not, they will need to raise rates more. The markets are uncertain as to the way this will evolve which is leading to volatility but this will pass as we move into the Spring and the required actions of Central Banks become clearer.
With all the talk of inflation-led economic growth and the prospect of rising interest rates in the UK, we have seen Sterling strengthen against a number of currencies which, in the short term, has not helped overseas investments. We do not see Sterling appreciating greatly against other currencies from these levels and would not be surprised to see it fall back a little in the coming months – but while the strength lasts it will make overseas purchases cheaper and may provide a welcome boost to the beleaguered travel sector. This could help a severely damaged sector of our economy recover towards its former glory.
Not only have overseas investments suffered due to current movements but in the last few weeks we have seen some of the gains made towards the end of 2021 eroded by the volatility. Markets were somewhat euphoric through 2021 as a recovery from the Covid pandemic was predicted, but now that the sober reality of a more traditional economic outlook is more likely there has been a degree of profit taking.
The good news is that your fund managers are well versed in managing moneys in volatile and more difficult times. Frankly, now is when they earn their money and we will see the benefit of using “stock picking” fund managers as opposed to bland managed or index based funds. We are in regular contact with the managers and feel confident that their medium term strategies are in place and will benefit from the market conditions that will develop over the coming months.
As we all return, to a greater or lesser degree, whether now or later in the year, towards the behaviour we had before being hit by the Covid pandemic, we will see the economic development of strong businesses and those that take advantage of the opportunities that present themselves. We rely on the fund managers to pick the right companies in which to invest and will continue to monitor their performance and make recommendations to change when appropriate. It may well be a bumpy few months but the medium-term outlook continues to be promising with the potential for good returns over the medium term.
This article is the opinion of David Wheildon,
Director of Skybound Financial Planning.
This article is the opinion of David Wheildon