Fiducia Portfolio Update and Market Outlook – Feb 2022

Market Update

Since the end of last year and into the beginning of 2022, we have witnessed a large rotation of funds out of growth orientated tech, small and mid-cap stocks, to value orientated large cap stocks, primarily due to the anticipated rate hikes by the different Central Banks, which caused a slight correction in markets.

Despite this sell off, we felt it was a healthy correction from the rather extreme heights that markets had reached, and we still held a cautiously optimistic outlook for the remainder of the year. In many areas of the world, particularly the UK and US, there has been a move from a ‘just in time’ production process, to a ‘just in case’ process, and whereas over the previous 40 years capital spending in the developed world has been on a downward trend, partly because people have been outsourcing production to the emerging markets, this now looks to be changing, with a capital spending revival now being seen in areas such as infrastructure, defence (quite topical), climate mitigation, and labour-saving investments, which are all supportive of further growth. To benefit from this, we have increased exposure to real assets such as property, infrastructure, and commodities within your portfolio, and they will be an important feature both now and long-term.

In addition to this, inflationary pressures around the developed world have been creating further uncertainty for markets. Central Banks are having to attempt to slowdown rising inflation without stifling growth and are beginning to bring in rate hikes.  The markets have currently priced in a 50bps rise by the Federal Reserve next month, which we don’t believe will cause any further shock to the market, and in fact, any less than this may be a pleasant surprise to the market. The medium-term issue here is what is the level that interest rates will settle at? This will largely depend on inflation, and therefore how hard and fast the Federal Reserve raise interest rates. Currently, the markets expectation is that we will end the year at a 1.75% interest rate in the US. Again, supporting exposure to real assets with inflation linkage in the portfolio.

One positive of the year so far has been the re-emergence of the UK and Emerging Markets (EM), in particular China. It has been quite noticeable that the previous laggards of last year, such as large cap UK and EM companies are beginning to outperform their US and EU counterparts. As we witness interest rates rising in the developed western world, interest rates in China are in fact falling and the government are becoming much more supportive, and the high inflationary environment we are experiencing in the UK has been beneficial for the large cap stalwarts of the FTSE 100 who have established earnings.

Russia invade Ukraine

Following the recent events unfolding in Ukraine, it is obvious this has created a large sell off in financial markets – primarily driven by fear and uncertainty as opposed to a change in fundamentals or macroeconomics.

Last week saw US President Biden outline stronger sanctions against Russia and their businesses, which appeared to improve the risk sentiment in markets, with a rebound on Wall Street, and the increase of risk appetite appearing to roll into the London Stock Exchange and Asian market.

Since then, Vladimir Putin has put his nuclear forces on high alert, which has led to the US and Europe unveiling further sanctions on Russia, preventing certain banks from using SWIFT (The Society for Worldwide Interbank Financial Telecommunication), which provides services for the execution of financial transactions and payments between banks worldwide. This unprecedented sanction has already had a large effect on the Russian Rouble, which dropped to almost 118 against the US dollar, and in response, the Russian Central Bank has boosted its interest rate from 9.5% to 20%.

Fiducia’s view as it stands

Russia is the world’s second largest producer of oil and gas, and despite BP recently seeking to divest their near 20% stake in Russian state-oil company Rosneft, if we the UK, stopped buying from Russia, it is difficult to picture where the shortfall could be made up from, therefore we do expect higher energy prices for some time yet.

The sanctions imposed on Russia are likely to have a limited short-term impact, but over the medium-term, these could become relevant, and due to the indirect impact they could have on the rest of the world, they need to be considered carefully. We may even see China lend a helping hand to Russia and come to their rescue; however, this is yet to be seen.

An area we believe to currently be underestimated, is the effect recent developments will have on food prices across the world. Not only are Russia a large producer of fertilisers, but both Russia and Ukraine supply 25% of the worlds production of wheat, which clearly could cause difficulties for the rest of the world and lead to raised food prices, and therefore even higher inflation than previously predicted. Some possible good news to take from this would be that Central Bank tightening may in fact be more moderate than expected as they will be more concerned about growth rather than medium-term inflation outlook, which could benefit financial markets. We predict that these current events will reduce, but not derail the current bounce in economic growth, and we may witness some loosening in fiscal policy.

How are your portfolios positioned at Fiducia?

As previously mentioned, real assets with inflation linkage are, and will continue to be important constituents within your portfolios, and across the range of Fiducia portfolios, these are accessed through defensive funds such as Ruffer Investment Company, with high weightings to inflation linked bonds, and commodities, that will provide lower volatility and greater capital protection than the broader market. Your portfolios continue to be ‘anchored’ by weightings to physical gold through the Wisdomtree fund which will act as a near term hedge during these periods of high volatility. But of course, our positions are primarily taken with a long-term investment outlook, and these recent events have most likely only increased the momentum of sustainable investing further, which we already have strong positions in through the Foresight Sustainable Real Estate, and Global Infrastructure funds.

Of course, this is an evolving topic, and we will be watching it very closely, but it is important to note that our portfolios are constructed with diversification at the forefront to limit as much downside risk as possible, but during systemic events such as this, it can be difficult and near on impossible to come out unscathed. However, it is important to not let short-term decisions impact long-term growth.

A final point for thought

Reuters have produced an article which explains that over the past 29 geo-political events, including World War 2, on average, stocks have been higher three months following the initial shock, and following 66% of those events, markets were in fact higher only one month after the initial incident.

A long-term mindset to investing can sometimes be difficult, but only a small amount of time out of the market can sometimes have large negative effects to portfolio performance.

If you’d like more information regarding your portfolio, please do not hesitate to contact our team.

Please note: this update does not constitute financial advice, if you are not a client of Fiducia, please seek regulated financial advice before making any investment decisions.