See what Robert Jeffree's market views are for the next 12 months
Over the past 12 months, we’ve navigated an ever-changing macroeconomic and market environment. Economic growth picked up in Spring 2021 as vaccines paved the way for economic reopening, though at different paces throughout the world. As economies reopened, we saw inflation pick up sharply due to a backlog of supply chain disruptions amongst other things. Central banks were initially confident that inflation would be transitory, though in reality it has been stickier than they expected and so far, the Bank of England and the US Federal Reserve have both began raising interest rates to combat inflation. At the same time, the very strong economic growth we initially saw as economies reopened started to slow down to more normal levels.
Aside from inflation, and in particular rising energy prices, other factors contributed to market volatility and rocked investor sentiment during the year. Covid variants Delta and Omicron stalled full economic reopening and challenges in the Chinese property market were two of the big factors impacting sentiment in the second half of 2021.
2022 has so far been dominated by Russia’s invasion of Ukraine and the ongoing war. I am pleased to report that Omnis had instructed all our investment managers to divest from Russia and Ukraine ahead of the invasion and as such none of your portfolios had any direct exposure to Russia or Ukraine when the invasion took place.
Of course, the war has had repercussions across the world. Volatility in markets rose significantly, and many of the OMPS portfolios have experienced falls in value in 2022. On one hand, the portfolios with more equity exposures experienced the sharpest falls given this market volatility but have since somewhat recovered. On the other, the more cautious and defensive portfolios, which have higher exposures to bonds, have experienced less volatility but have also seen losses this year too. While events in Ukraine and concerns over the economic outlook might ordinarily be expected to boost the appeal of ‘safe haven’ assets, including high quality bonds issued by the likes of the US and UK governments, the threat of inflation has outweighed such considerations. As a result, bonds have suffered losses so far this year.
OMPS has a long-term investment horizon and short-term volatility in the portfolios is to be expected. Through our tactical asset allocation approach, we have managed your portfolio actively through the year and will continue to do so, but the portfolios are naturally susceptible to market movements.
Looking foward Despite ongoing uncertainty caused by the war in Ukraine, a degree of stability has returned to stock markets as investors perceive that some of the worst-case scenarios have become less likely. However, the unpredictability of the situation means we can still expect to see some volatility in markets for some time.
Russia’s invasion of Ukraine, and China’s zero-Covid policy continue to cause inflationary pressures. The invasion has elevated energy and commodity prices, whilst the localised lockdowns in China are disrupting supply chains. Both factors contribute to rising prices but there are signs that a peak in inflation is not far off. In the US, key components of inflation such as second-hand car prices are set to fall sharply. In Europe, cuts in fuel duties have been announced.
Around the world, central banks are now raising interest rates to combat high inflation after lowering them during the pandemic to help boost growth. The increases are designed to limit inflation by encouraging people and firms to borrow and spend less, and to save more. Continued rate rises are signalled by the central banks in the US, EU and UK. Should these come to pass, it is likely that economic growth will slow. Most central banks are mandated to control inflation, but overly aggressive rate rises could engineer a recession. This would be a high price to pay for cooling inflation. However, after the trials and tribulations of the past few years it remains to be seen whether central banks will be willing or able to go this far.
We realise that in the short term, market sentiment is likely to remain very sensitive to events in Ukraine and that the risk of recession remains elevated. Within OMPS, we stay true to your long-term time horizon (minimum of 5 years) whilst managing the risks and opportunities over the shorter to medium term.
Whilst you could expect volatility to persist for a little longer, it’s important to stick to the plan set out by your financial adviser. It can be disconcerting to see portfolios fall in value and as an investor you may wonder if it would be best to sell out and wait for markets to recover. History shows us that remaining invested through the volatility is always the better strategy, as can be seen in the chart on the next page.
To assess the impact of divesting when big markets shocks occur, we assessed two identical ‘Balanced’ portfolios*. In one portfolio, the investor pulled out when the market fell 10% and only reinvested once stock markets had risen 10% from that point. In the other portfolio, the investor stayed invested throughout. As shown in the chart, missing out on recoveries can be very costly for long term investors.
Source: FE fundinfo – 1st January 2010 – 31st December 2021. *Using Graphene C2 Balanced Index Equivalent for Balanced Portfolio. Assumes investments are withdrawn when market falls 10% and reinvested when market subsequently recovers 10%
