Just as I was beginning to think spring had finally arrived after a pretty gloomy winter, I awoke this morning to snow flurries and freezing temperatures; let’s hope spring for real is not too far away.
As you will doubtless be aware, markets have been battling a number of headwinds over the past few months, the ending of the pandemic (maybe we are not quite there yet), rising commodity prices (in particular gas and oil) and of course the war in Ukraine.
As the world returns to some sort of normality, following the dark days of the pandemic, businesses that had benefitted from lockdowns (Netflix, Amazon, Apple and Peleton, for example) are coming off their all-time highs and industries that had suffered, are doing rather better. The problem is that many companies had effectively mothballed factories and workforces and the sudden increase in demand for their goods and services has led to rising inflation, which has only been exacerbated by increasing commodity prices. Supply chains that were effectively broken by different countries locking down at different times have also yet to be repaired – look at China right now, back in lockdown. Central banks, as they always do, have turned to increasing interest rates to try to exert control over this inflation and this too has put pressure on financial markets. Higher interest rates in corporate world means higher borrowing costs, leaving less for investment etc.
Not all markets have been affected equally, and this is why I wanted to shed some light on what has been going on with your investments with Clearwater.
Over the longer term, US markets have consistently outperformed UK markets, largely because most of the ‘new’ industries, technology in particular, are based there. Conversely, the UK market and certainly the FTSE 100 is made up of more traditional, dare I say, ‘old’ industries, such as oil, mining and banking etc. Since early January therefore, owing predominantly to rising oil and gas prices, the FTSE 100 has (quite unusually) been outperforming the main US Indices (Dow Jones, Nasdaq and S&P 500).
This unusual occurrence has coincided with Clearwater and our investment advisers, EBI increasing our exposure to the US as part of the move to the ESG range of portfolios. Most Transact clients have now made the transition and Standard Life clients are being invited to make the same change right now.
To give you an example of how things are changing/have changed within the portfolios, EBI Portfolio Vital 60 contained US exposure of 30.77% and UK exposure of 26.79%. The equivalent ESG screened Vantage Earth Portfolio 60 has US exposure of 50.07% and UK exposure of just 6.98%. This means our new portfolios are much more sensitive to movements in US markets than the UK.
The following charts will demonstrate why EBI have been keen to make these changes and also why, because of the unusual global economic backdrop, there was a period after Christmas where this worked against us.
This first chart shows the FTSE 100 vs S&P 500 over 5 years. The outperformance of the US, largely because of the rise of the tech giants, is clear to see.
This next chart looks at the same 2 indices over the past 12 months and the picture is the same, The US has outperformed the UK, although there was a coming together around the turn of the year.
BUT! The next chart focuses on the Year to Date and here we can see a slightly different picture. Since the beginning of Jan, the US markets have fallen whilst the UK has remained buoyed by its concentration in industries that have benefitted from the commodity boom; think of Royal Dutch Shell and BP etc.
When we look at just the last month however, we start to see a return to what I would call, ‘normal service’ being resumed. Since the end of Feb, the US has been back firmly in the driving seat once again and it is probably only a matter of time before the lines in the chart above cross over – no guarantees of course.
As progress towards a cease fire in Ukraine continues to be made, albeit falteringly, markets have calmed down somewhat and many of the losses (on paper only, of course) have been recovered. I don’t know whether this heralds a return to more normal markets (just a misspoken word by Biden, Putin, Zelensky, Johnson or any of the other many protagonists, could shake things up once again), but let’s hope so.
Please also remember, there will always be something affecting markets but as long-term investors we can generally relax and ignore short-term volatility, it only hurts us if we sell!
Regardless of investment markets, I am sure we all hope for a peaceful resolution and an end to the suffering in Ukraine, as soon as possible.
I hope the above is helpful but, as always, if you would like to discuss this or any other finance related matter, please do not hesitate to contact me.
With kind regards,
Yours sincerely
Graham Ponting CFP Chartered MCSI
Managing Partner
