Market Updates

Taking Stock

March 18, 2022 – Written by James Baxter

Glad to see the sun out in Barnes today. The blossom is out, trees are going green again, Spring is on its way! 

It’s been a tough start to the year for sure and its worth taking stock of what has been going on as the drama in Ukraine unfolds.  

Monday this week marked a short-term low point in the US Nasdaq, coinciding with a final capitulation in Chinese tech stocks which sent the Chinese market steeply lower. Our Tuesday night valuations marked a similar low point.  

Since then, there has been a strong recovery and about face in many markets: 

  • Oil prices have dropped back a bit from a high of $115 to just over $100 a barrel 
  • The US Nasdaq has recovered around 8% in 4 days from its low on Monday evening  
  • The Hong Kong market jumped around 10% on one day on Wednesday and is up 16% in 4 days with strong gains in China and other emerging markets 

These moves are pre-empting better news from Ukraine and were on the back of further evidence that growth is continuing in most of the world. Normalising interest rate rises are less urgent, but they are still able to happen.  

The strength and speed of these bounces reminds us why we stay invested, although we are still down year to date, it is going to take a while to fully recover. Our Multi Asset Balanced portfolio is now off around 6.5% year to date.  

We have some managers doing pretty well.  Our global infrastructure fund and Asian equity income fund are up year to date and our higher yield value equity funds are all holding value better than the wider index.   

Our emerging markets, smaller companies and US growth fund and our Hybrid Capital fixed income funds have been hardest hit and Nick Gait below outlines a second move we have made this week towards more defensive strategies. We will continue to keep this under review and make changes we feel are sensible, without betting the ranch and trying not to sell things about to rebound!  

There is no doubt sentiment is much more cautious in the aftermath of the invasion and it will take a while before that wears off, so we think it’s entirely prudent to batten down the hatches a bit even as things recover.  Everything is just a bit more uncertain, especially when there is a highly armed tyrant in town. 

We mentioned in the last update the impact of the Russian market suspension, we may also now see a default in Russian debt. We had, and continue to have, limited exposures in these areas.  

You will now also read about the demise of ‘US Tech’ in 2022, the Nasdaq was down 20% on Monday evening this week, the definition of a bear Market – although it did not last long. Given the likely headlines I wanted to draw attention to the generalisation here and use of the word ‘tech’ which is a gross misrepresentation in many cases.  

Firstly, stocks like Microsoft, Google and Amazon – ‘US Big Tech’ whilst down, are just repricing a bit after strong gains. They are all only down about 10% from all-time highs having made huge gains in the last two years. The exception is Facebook or Meta Platforms as it is now called off almost 50%….always beware companies who feel the need to rebrand! It’s a moot point as to whether these are tech companies anymore, they are now huge and diverse businesses with strong online presence, enormous balance sheets and extraordinarily huge profits.  We have exposure to these companies in several of our funds.  

The real damage on the Nasdaq has been done in smaller cap ‘US tech’, some called ‘meme stocks’ due to their popularity with retail investors. These are highly speculative growth businesses, usually losing money at a pace, but listed on the Nasdaq (with promises of future riches) as high growth ‘tech’ business, when they are not tech at all. Here the damage is much more extreme and, in some cases, will create permanent losses. Whilst rising rates may have been the catalyst and the Ukraine crisis has added fuel to the fire, a lot of this is about a change in sentiment and the emperor’s new clothes getting seen through…so to speak!  

Businesses like Robin Hood (stock broking), Peloton (gym equipment), WISH (online retailing), Opendoor (real estate broking) and Affirm (consumer credit) to quote but a few. There are lots of them and they are all showing huge losses (drops of more than 75%) from speculative 2021 highs. Some will survive, some will not. Thankfully, we have no exposure to these. 

Ballie Gifford is our most active and highly respected fund manager in the global growth space; however, we deliberately chose to use their more risk controlled Global Alpha fund when we invested a few years ago, rather than some of their spicier funds. This was to protect ourselves in these kind of market conditions.  The Global Alpha fund is off around 15% in the last three months (broadly in line with the Nasdaq) versus their hugely popular Scottish Mortgage investment trust, down around 30%. 

We have been liaising closely with the management team on the Hybrid capital fund, we have been here before with this fund which always suffers when fixed income markets get less liquid and market makers play havoc with any forced sellers. The team are not selling, not worried about any defaults and we expect a strong recovery as liquidity and demand for these securities returns.