Discretionary Investment Management | Ravenscroft Group | William Lynne
24 Jan 22

Weekly update - Dark forebodings

This week’s update comes from William Lynne, one of our investment managers in Bishop’s Stortford.

As I write this note, there are dark clouds above the markets. “Rio shares slump as plug pulled on Lithium project”. ”Siemens Gamesa shares slide after latest profit warning”. ”BoE to raise rates again in February as inflation surges”. “Disappointing subscriber growth from Netflix” etc, etc1.

When the market is in the mood to go down there seems to be only bad news. Of course, we can rationalise all the above headlines, and a year ago there would have been – no doubt – a positive spin to be found for each story, but the markets are no longer in that frame of mind; so down we go.

The cracks are showing clearly now, but this has been brewing for some time, camouflaged by apparently strong market indices. Around 75% of Nasdaq stocks are trading below their 200-day averages2. Yet at the start of the year (just three weeks ago) the index itself was not too far from its all-time high.

Capital was being re-shuffled under the surface, as it appeared many had given up trying to pick winners and instead had moved (passively) to the mighty FAANGs (Facebook, Apple, Amazon, Netflix, Google) – or whichever acronym is currently in Vogue. Quite literally 40% of all the MSCI World return came from 10 companies. This is patently bonkers and is the sort of concentration of wealth and power that precedes most revolutions. Already we are seeing these mega-caps get re-rated downwards. It is unlikely that the beaten-up middle and very long tail will do anything other than fall down in sympathy too, because we are in a market driven by the bad news, which right now is all the news.

The headline crisis is around inflation: Will it, won’t it, how much and how long? Apparently high inflation = high interest rates = reducing DCF (discounted cash flow) valuations for high growth stocks. This is ridiculously simplistic. Undoubtedly some stocks will struggle with high inflation and/or higher interest rates but the “growth” or “value” tags, or indeed the geography of the listing attached to those companies, will not be the defining factor in how much or little they struggle. As I write, the broader market is getting sucked into the plight of the Nasdaq canaries.

So what to do?

The first thing is to take a deep breath and a step back.

This is not a crisis with unknown unknowns like COVID-19, nor is it a crisis with a potential socio-economic catastrophe, like the Great Financial Crash. Rather, this is a clunky transition from the Central Banking life-support mechanisms towards the promised land that we hope is “normal”. In the current febrile environment, any blink from the Fed is likely to be met with overreaction in all directions as we all (including the Fed, politicians, and legislators) discover where equilibrium might be, and I am not sure they have much more information than we do.

During times of uncertainty, it is more important than ever to critically appraise ones approach and ensure client portfolios are suitable for the environment ahead. Whilst we maintain our belief in the longevity and appropriateness of our core investment themes such as emerging consumption, healthcare, and technological innovation over the long term, weightings to them may need to change. Successful navigation of periods of uncertainty may also require us to lean on areas of the market we have previously shunned. Being flexible and pragmatic is important, and we will, of course, ensure you are fully informed on any changes that may impact your portfolio.

We hope you have a good week and if the headlines are concerning you please do get in touch with your relationship manager.

Sources:

  • 1 Stockcharts.com (21st January 2022)
  • 2 reuters.com (24th January 2022)
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