Welcome to your May investor update.
I'm Matthew Smith, a paraplanner at Nutmeg.
And I'm joined today by our director of investment strategy, Brad Holland.
Hi, Brad.
Hi, Matthew.
Markets seem to have a rough April.
There's been talk of a bear market.
What is it, and should investors be worried?
A bear market is a 20% drop
in financial prices from their most recent high.
And there's been speculation the S&P 500 index -
the US large companies - might breach that point.
In April, US large cap stocks fell 8.7% to be down 12.9% year to date.
Now, 10% fall is considered a correction and they happen reasonably often -
seven times since 2010. Large US technology stocks
however, they have crossed the 20% bear market threshold.
The NASDAQ index, which we don't own in Nutmeg portfolios,
fell 13.5% in April to be down 21% year to date.
This bear market in tech stocks took hold as economic reopening
removed the work from home premium these stocks had enjoyed.
In addition, online subscription levels have plateaued or even declined
as households cut costs in response to the sudden price shock being experienced.
China's continued heavy handed
oversight of its tech companies, that's provided further
negative background noise for the digital companies.
We've seen a steady rise in bond yields in 2022 as central banks
changed their posture from emergency ease conditions towards urgent tightening.
How has this been impacting markets?
Well the rise in bond yields has been a key
driver of weakness in the values of the big technology companies.
The reason being is quite technical.
It's not so much that rising yields will hurt earnings because rising bond
yields are also a sign that equity markets are enjoying good earnings growth.
For technology stocks, whose earnings are viewed to be strongest
in future years,
rising bond yields cause these future earnings to have a lower present day value.
It's a mechanical valuation process.
We've not had a specific technology position in the portfolio since late
last year because we expected this rise in bond yields to occur.
But it's not just about US equity and bond markets.
World equities fell with local currency returns down 8.3%
in April to be down 12.9% year to date.
Still closer to home, the FTSE 100 did make a marginal gain during the month.
These blue chip stocks have been buoyed by a weak pound
and many of the UK's largest listed companies focus on overseas earnings.
The FTSE 100 is also home to the large energy companies
which have had a strong year as commodity prices have climbed.
And on that note, oil prices themselves stabilised during April,
while a broad basket of commodity prices actually rose around 4% in the month.
Mining commodities fell 6%, with the bigger agricultural basket
rising 5% on supply shortages.
So bonds and equities were both down in April.
Normally we see one or the other down, but not both.
Is that right?
Yes, under normal circumstances we expect a negative
correlation between bond and equity returns.
Positive correlations do occur when markets fret about inflation
and with the reported inflation readings hitting multi-decade highs in April,
this positive correlation between bonds and equities did play out.
Equity markets are worried that the price
impact of the supply shock, together with tighter monetary policy,
will have a destructive impact on demand for goods and services.
The worse the Ukraine conflict looks, the more negative
the overall situation appears for the global economy and markets.
April was a month where this pessimism was sharply felt.
Although the US earnings reporting season in April was reasonably firm,
there were fewer positive surprises than previous seasons
and enough big corporate names such as Amazon, disappointed.
And this further soured the market mood towards the end of April.
So equity markets think the world economy is stalling.
Is there evidence for that?
Growth is certainly cooling, but we don't see the global economy as stalling.
Manufacturing and capital investment cycles
have positive momentum and order books are very solid.
This implies global trade will continue the recovery.
The Russian war in Ukraine and the Chinese domestic clampdown on COVID
are headwinds for global growth, but they don't look to be
debilitating activity in the US and Europe, for example.
These forces will have an impact, obviously, but we don't think it will
derail the recovery happening in developed economies.
The May monetary policy report from the Bank of England has revised
the bank's growth outlook down to be flat across 2023
due to the real income shock of higher prices in this year, 2022.
They think a technical UK recession is possible and these are just forecasts
of course, and will be revised every quarter
but they show how closely we need to watch the economic data over the summer.
Thanks Brad.
Did you make any changes to the portfolios in April?
At the start of April
we trimmed some equity exposure and moved that money into cash.
That wasn't a vote against equities and
indeed we remain slightly overweight the asset class.
It was just recognition of the drift in asset allocation that had occurred
this year due to market movements -
a portfolio of management "rebalancing" exercise.
That cash can be reinvested as we see better opportunities.
Brad, a customer has questioned the investment team's view
that inflation will moderate into next year.
He asks if we are being overly optimistic, what would you say to that?
For sure, the share price rises are tough this year
as higher food and energy prices work through the system
as the supply shock continues to work itself out.
We do think inflation will likely remain at the high side
of the Bank of England's 2% inflation target.
However, it's important to remember that inflation is defined
as persistent annual increases in prices.
A rise in prices during one year, however painful, will not feed
ongoing inflation unless follow up increases occur in subsequent years.
The Bank of England forecasts assume this follow up
increase does not occur, and we are inclined to agree.
Do read our recent View from the Investment Desk update
for a wider discussion around these points.
Many thanks, Brad. Thanks, Matthew.
And thank you for joining us.
If you have any questions for Brad or the investment team or a topic
you'd like us to discuss in next month's investor update, you can contact us via
social media, email or in the comment section below this video.
If you would like to discuss the management of your investments
or discuss your investment options, you can also book a free call with me
or a member of the wealth services team through the Nutmeg website.
We look forward to seeing you next month.