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Investing in volatile global markets

Since the middle of this month markets have sharply reversed the gains of recent weeks, reacting to a higher than expected CPI (consumer price index) report in the US, and leading to equities and bonds both selling off in marked fashion. Charlie Buxton, our Head of Investment Management, shares an update on global market developments.

Last Monday US stocks closed in a bear market – with the S&P500 20% below its January all-time high – as stubbornly high inflation and the prospect of more aggressive rate tightening from the Federal Reserve, led to a souring of sentiment across global equity markets.

Government bond prices across the US and Eurozone have also sold off strongly, pushing yields higher – particularly amongst Europe’s periphery – as elevated inflation levels drive Central Banks to raise interest rates, in a belated effort to reign in higher prices, particularly impacted by non-core items such as food (+12% year-on-year) and energy (+48% year on year).

The ongoing war in Ukraine and relentless city-wide lockdowns in mainland China are the headline concerns around the stickiness of inflation, although pent up demand in a largely post-Covid world and higher wages – particularly in the US – are also adding to the broader inflation picture.

Across our investment strategies, we were concerned about the nature of inflation at the start of 2021 and positioned our portfolios accordingly, with a greater emphasis on shorter duration assets, notably those with less interest rate sensitivity. Since October last year, we’ve also added to assets that might be classed as ‘alternative’. These could be real assets, tied to physical assets whose returns might be more able to keep pace with inflation, or carefully selected absolute return funds whose overall performance tends to be less influenced by other asset classes. We also believe that our value styled tilt will benefit investors in the long run, and certainly this style of investing has performed comparatively better in the current environment, at least relative to ‘growth’ assets.

There is no doubt that – after years of supportive monetary policy together with the fiscal support provided during the pandemic years – we’re now entering a significantly more challenging time for markets. It appears that Central Banks are prepared to tighten financial conditions, even at the risk of undermining economic growth, in order to try to bring down inflation.

It’s also our view – as we’ve said before – that whilst the current picture remains unfavourable to equities and bonds, staying invested over the longer-term has proven its worth time and time again. We have seen countless examples in the history of investment where the temptation to try to time markets can lead to a longer-term drag on performance, and hence our belief in a well-constructed, well-balanced portfolio, with a preference for more alternative like assets at the current time.

To discuss any aspects of your own portfolio, please get in touch with your dedicated Financial Planner at The Fry Group or contact us.