The State of Change

Currently we don’t know who our Prime Minister is going to be, when the war in Ukraine will end, whether or not the trains will run next month, if it’s worth trying to board a plane to go on holiday or if the weather is actually too hot to be enjoyed.

There is a great deal of “noise” around in what is usually a quieter time of year for investment markets; in previous years the Summer has been a time for economic reflection and contemplation and politically a quiet time as Parliament moves into recess. This year is different but despite these noises we are able to listen to the very beginnings of encouraging signs in the economy.

We are all still embroiled in the mire of the cost of living crisis and the economic fallout from the war in Ukraine but there are the first signs that core inflation (which excludes energy and food) may have peaked. The oil price has now fallen close to or to its pre-invasion level and there are signs that demand is slowing due to the recent increases in interest rates.

There may be market trouble ahead in the very short term as businesses report on the first 6 months of this year which have clearly been more than difficult but as markets often look 9-18 months ahead there could be signs in the next 3 months of some positive news. Further we do not expect future interest rate rises to be excessive as they are having little effect on the prices of energy and food and do not encourage the consumer to avoid spending moneys in these areas. The fact that Central Banks have already raised rates and shown that they are prepared to consider raising them further has already started to achieve its aim of affecting demand in the industrial sectors.

Continually working through difficult times.

The last 6 months have most definitely been difficult for many sectors of the economy and the investment management industry is no exception.

We have seen certain specific sectors thrive such as tobacco shares and the movement in these areas has distorted returns. By overweight investing in such sectors some managers have been able to produce better returns than more appropriate, well diversified portfolios. We view this attitude as dangerous and would prefer to maintain the view that a well diversified and balanced portfolio of holdings bought and held on a medium term view is the way to proceed. By holding too many eggs in too few baskets it is possible to produce returns in volatile times but this is often at the expense of increased risk and volatility.

We continue to believe that the way to deal with troubled times is to work through them continuing to invest in well managed investments with strong cashflows rather than by gambling on individual sectors outperforming. Our discussions with the fund managers confirm this and the historic results show that this attitude has been proven to be correct over time.

Catching the sentiment change.

The technical definition of a recession is two consecutive quarters of negative growth which in simple terms means that over a 6 month period the economy shrinks in size rather than grows. It is highly likely that the major western economies will enter recession at some point this year but we mustn’t let this create worries similar to that of 2008/9 in the Great Financial Crisis.

Although there are worries in the very short term and it does feel as if the global economy is running up that hill it may well be time to suggest investment markets are bumping along the bottom and there is now potential for upside. Many years ago stockbrokers used to say they would “sell in May and go away” meaning that they would return to work in September with renewed vigour and market movement. Although this may turn out to be one of those years the actual timing of the change in market sentiment is impossible to predict and if we were to try we would miss it.

On this basis I reiterate that the way to work through the current troubles is for us to keep in close contact with the fund managers
(which we do) and remain invested so that we can be sure of catching the sentiment change when it eventually comes.

This article is the opinion of David Wheildon,
Managing Director of Skybound Financial Planning.

This article is the opinion of David Wheildon