Welcome to 2022, it’s a bit bumpy out there, seatbelts on! This is a slightly longer update today, but there is a lot going on.
We know many of you are watching some of those nice portfolio gains disappear on the portal. As ever, we are watching closely and will give you an idea of what we might do, if anything. I’ll cover the big picture, Nick Gait below goes into a bit more detail and talks to the manager of one of our worst hit funds.
There are a few factors at play, such as the Ukraine Russia crisis and BoJo’s party antics, but the two main factors driving recent market movements are:
- The US Fed and its Quantitative Tightening (QT) Timeline – This is about the US Federal reserve stopping the buying of treasury bonds (Quantitative Easing (QE), and actively shrinking the balance sheet), and raising base interest rates in the US. TS Lombard believe the Fed will start QT in July and proceed at a pace in slowing bond purchases by $100bn a month. In addition, they might now hike base interest rates 3-4 times in 2022, starting in March. These will probably be small steps of 0.25% at a time. The hawkish tone (more hawkish than consensus was expecting) is generally negative for markets. Less liquidity means fewer buyers and higher rates means more expensive money. Long term it is good news, we are heading in the direction of what was previously considered ‘normal’ pre the financial crisis.
- The Omicron Variant – Promising data on hospitalisations and deaths is leading some experts to believe the end of the pandemic is nearer than initially thought. This could lead to the lessening of restrictions and a world learning to live with the virus. This would be positive for economies generally.
Against this backdrop, and we checked again this week during our call with them, TS Lombard remain positive and overweight Equities and underweight Government Bonds.
On Our Fixed Income Positions
Rising rates are a challenge for fixed income, but all of our managers are acutely aware of the conditions and are investing accordingly. We are overwhelmingly invested in corporate bonds i.e. higher yielding corporate bonds with no exposure to Government bonds, which have been hit the hardest. According to FE Trustnet the average UK gilt fund is down c.5% in the last month and 6% over 12 months.
Unlike government bonds, corporate bonds are still providing a decent yield; Sanlam Hybrid Capital and Artemis Short Dated Global High Yield funds yielding 4.3% and 3.99% respectively. For those exploring how bond structures can play a role in generating sustainable retirement income while supporting longer-term tax planning, this is a useful reminder that income, duration, and tax efficiency often need to be considered together.
Sanlam Credit: Yield 3.1% & duration of 2.9.
Artemis Short Dated Global High Yield: Yield 3.99% & duration 1.85.
This short duration has two positive impacts:
- If rates rose by 1% these bonds on average would typically fall by the value of their duration figure (in simple terms) but be back to flat within a year due to the higher level of income being received should there be no further movement in rates
- A relatively large percentage of the portfolio will mature at regular intervals allowing the managers to reinvest at these new higher rates.
5-year rates in UK gilts have gone from 0% in the summer of 2020 to c1% today, the last time they hit 2% was in 2014. It is certainly possible that they reach this level again but if inflation does peak out as many commentators believe, rates will flatten and our bond funds should start to make positive returns quite quickly.
What We Might Do
Whilst some of our top performing funds are handing back some profit from last year, we are generally happy with our positioning in both fixed income and equities. If we do anything, we may consider hitting the rebalance button in the coming months. This would buy some more of the falling funds (which would be reset for higher future profits) and sell some of the rising funds at a profit.
Some equity valuation examples
It is always good to look under the bonnet and see how some company’s share prices are doing. The two factors above are driving some companies shares up in value, some down and are decimating others.
Going Up
Royal Dutch Shell was up 12% on the year by the 18th January, it has fallen 3% in the last few days to be plus 9% YTD. The price of oil is up along with many other commodities and Shell’s chunky dividend means investors see returns this year and next rather than 5 years away, so they are less affected by interest rate rises which analysts use to discount future earnings. But how good is the long-term prognosis for Shell in a world which is decarbonising? Remember Shell’s share price today is slightly lower than it was when we welcomed in the new millennium 22 years ago. Shell and BP lift the UK FTSE 100, and along with other similarly valued companies will be in some of our income and value funds which, as Nick highlights, are our best performers YTD so far.
Going Down
The mighty and (much discussed in this update) Microsoft is down approximately 10%, really just on the back of the rates rise issue and sentiment and remembering its value is still up around 35% over the last 12 months even after this sell off. Microsoft shares were $50 each 22 years ago and that was at the very top of the dot com bubble, they are $300 today. Microsoft has just bought Activision Blizzard, which Nick tells me is a gaming business with a fabulous future and most are hailing it as great deployment of capital. Are we worried by Microsoft’s dip? No.
In summary, those currently going up are broadly Financials, Energy and companies who suffered during Covid. Those going down are Tech, Healthcare and companies who benefitted from Covid. We are not going to buy more of the former, we might take some profits and buy more of the latter as the year goes on.
The Decimated
For those like me who are familiar with Sex and the City and the new series ‘And Just Like That’ the reference to Peloton will bring a smile. I won’t spoil the plot in case you haven’t seen it. The first few episodes are not too bad but as ever it is dragged out for too long (this is my view only and not shared generally in the Baxter household).
Peloton, the posh static bike maker, was one of the darlings of the Nasdaq in 2020. With everyone locked down exercising at home, unable to go to the gym or ride a real bike of course Peloton looked like a big winner. The bikes may be a bit expensive but you get some sort of Zoom style trainer thrown in and you can race your mates online…I think, I’ve never used one. In the hyped up tech/covid market of 2020 its value went from $8bn to $53bn. In the autumn of 2020 that was quite a lot more than the value of Ford Motor Co.
Since the vaccine announcements in November 2020 things have not gone well! “And Just Like That” did not help and yesterday someone caught wind that they were halting production on a few models to match falling demand. Turns out it probably should never have been on the Nasdaq. It is a static bike, essentially sports kit, demand has cratered and the costs to build and deliver are squeezing profit margins. The company value is back to $8bn, Ford meantime has moved back up to $86bn although still well below the $125m. it was worth in 1998.
We don’t and haven’t had any exposure to Peloton in any of our funds, thank goodness.
Peloton Share Price last 5 Years
Tideway Wealth Update
Finally, a quick update on Tideway Wealth. We are pleased to say we passed £450m. of clients’ money under management as we turned the year and have a pipeline of new business which we hope will take us through £0.5bn. in 2022 from a standing start in 2010.
Like many firms we would like to expand our team now but are finding it hard to recruit new staff through traditional channels. We have vacancies for advisers (trainee or fully qualified) and a marketing manager. If you know someone looking for a career in wealth management, please do let me, or your adviser know. We offer competitive salaries, a fun place to (hybrid!) work and encourage and support our employees to build their professional qualifications.