It is time to send all an update.
There is so much to write about and there is so much excellent writing already out there. I think all we can do is attempt to summarise and explain our views and behaviour and perhaps point towards more in depth commentary.
1) The news that rightly eclipses all else is the tragedy of the Middle East. The firm has a very long-standing tradition of avoiding political comment. I have on rare occasions gently pushed back against that tradition; this is not one of those times. The unfolding tragedy that is on our screens every day has already caused thousands of deaths. Extraordinary numbers of armaments have already been shot or exploded.
Our thoughts are with all those personally affected by the wars in the Middle East and Ukraine.
There is a piece on our website looking at the immediate impact on investment markets. My inbox groans with the weight of analysis from all manner of commentators. As far as investment markets are concerned, they seem to be thus far little affected by the war. One of the biggest worries is an expanding crisis in the Middle East. Although not all Middle Eastern wars have led to increased oil prices, a widened conflict would surely lead to increased oil prices and increased inflation. If China were to become emboldened somehow, the consequences are deeply scary.
Oil prices had already risen markedly thanks to combined (synchronised?) actions from Russia and Saudi Arabia. These and any further rises will put pressure on inflation.
There are several good analyses that look at past wars and the impact on markets. In the long run, and usually the medium run and surprisingly often in the short run, stock markets after initial volatility, recover.
As we suffer from media fatigue the desperate situation in Ukraine garners less attention.
I have seen less press comment about defence spending than I expected. These two conflicts will (or already have) lead to increased defence spending which will worsen the already huge government debt positions in the developed world.
Which takes us to…
2) Interest rates, corporate bonds, gilts and treasuries. We know markets make imperfect predictions, but we also believe they make the least bad predictions. Markets are now pricing in interest rates higher for longer. Huw Pill (Bank of England chief economist) already predicted this outcome in August. He spoke of comparing the Matterhorn (steep up, steep down) with Table Mountain (he was in South Africa when he gave this talk) which is steep up but then very shallow down. The imagery is helpful but our history of the last 50 years has been of Matterhorn’s – very sharp interest rate rises followed by declines almost as fast. If this time, we are going for a Table Mountain scenario, where interest rates decline slowly, this is likely to dent confidence – both at a consumer level and a business level. It will also considerably increase the costs of financing government debt compared with expectations of a few months ago. It seems odd that I have read little about corporate bond defaults – those businesses built on spreadsheets that rely on cheap refinancing of debt are not looking very rosy anymore. But at least high-quality bonds are now yielding something that on the face of it looks far more attractive than 18 months ago.
3) I cannot finish without mentioning the Magnificent Seven – the apparently AI driven stocks ¬- Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. These stocks have single handedly (seven handedly) driven the US market higher this year. If you subtract these 7 stocks form the S&P 500 the remaining 493 stocks have collectively gone nowhere. This is extraordinary. I am delighted that we have exposure to these stocks through our broad market trackers (generally via Vanguard and Fidelity). But I am equally delighted that these stocks are a little underweight in our portfolios thanks to our tilts to small and value. In case you needed reminding, we believe in markets. But these valuations seem extraordinary. Huge successful businesses do not last forever. I remember joining Hillier Hopkins in 1997 and the excitement about the internet. I remember before I joined Hillier Hopkins working in the Middle East and our reliance on facsimile machines. I have just been reminded about Sun Microsystems – do you remember them? In early 2000 their valuation hit $150 billion. By 2002 it was valued at less than $15 billion and was eventually sold to Oracle for $7.4 billion. When Sun Microsystems was valued at $150 billion, turnover was about $15 billion. Nvidia currently has sales of $33 billion. But its stock price values it at $1.01 trillion. We are comfortable with being a little underweight in tech.
It is not easy to finish on a positive. Goodness knows how it will end up, but I thought the Polish election result was great news – Democracy kind of working – and thanks in no small part to the younger generation voting.
Thank you for being our clients. We are long term investors. While there is doubtless volatility ahead, we remain confident in our long-term strategy.
BS
