As we move into the second half of the year after a tough first, markets are showing some signs of life, however, they continue to be challenged after their post-covid recovery. Inflation, Energy shortages, the War in Ukraine, the threats from China over Taiwan, the increasing risk of global food shortages from the War and the exceptionally warm and dry summer, covid, transport issues, raw material shortages, (it’s a long list!) have all had a major impact on the world and investment markets, which always hate uncertainty.
Covid is still with us, the biggest challenge with it now being the continuation of the Chinese zero covid policy, and accompanying lockdowns. The good news is that as global vaccination takes hold, things do appear to be improving, in terms of mortality.
As Economies switched back-on the combination of loose monetary policy by global Governments, which resulted in excess savings over the lockdown periods and high demand, resulted in global demand and supply shocks which, in turn, has contributed to the largest increases in pricing for the last twenty five years. This is starting to ease which hopefully will help with inflation in the near future.
At the same time, the switch to renewable energy has resulted in a situation where for some years now there has been little investment in western countries developing new fossil fuel sources, due to the social and political pressures building against them. At the same time, the renewable industry is yet to fully find its feet in producing a reliable alternative source of energy, as needed by the modern world. This, along with the challenges with Russia, is causing a global energy supply crunch which has led to the recent increase in global energy prices.
The rise of Environmental, Social and Corporate Governance (ESG) has been a factor in this, as people seek to move in this direction with their lives. ESG portfolios, after a strong two years, had a tough first half but have evened out more in line with markets lately.
Globally, we are also seeing growing pressure to increase taxation on the wealthy to reduce inequality and fund some of the costs arising from all of this. As a consequence, reviewing our clients Inheritance Tax positions is high on our agenda, for those for whom minimising taxation is important when passing on assets.
The blockchain and cryptocurrency market has had a massive devaluation lately. It is estimated 1 in 10 people in the UK have put some funds into this arena. It is not an area we have participated in for clients, apart from a very small exposure to blockchain technology in our higher risk global portfolio. Our view remains that the technology is interesting and may have real value, (one of Switzerland’s largest financial institutions is now using the blockchain to settle market trades more quickly and at lower cost), but the coins themselves are not something a sensible balanced risk-taking investor would invest in.
We believe all of this will take some time to resolve and whilst as I said at the outset markets are starting to improve (they always look forward), we see volatility in investment across the board as the logical outcome for the immediate future.
One piece of good news is that dividends have continued their very strong recovery. Those assets that rose the most as part of the initial recovery (largely highly growth orientated companies), are those that have taken the most pain, whilst those in more traditional industries are more stable.
Our approach to this is, as always, to take a long-term view, be clear about what is short-term noise and what will really matter in respect of your portfolio. We will continue to control costs by using Exchange Traded Funds (ETFs) where we can, avoid trading unnecessarily, as well as maintaining a focus on quality.