Our Head of Advice, Andrew Sherlock provides insights on the current market in light of inflation and the Russia-Ukraine war. If you have any questions send us an email to ask@sherlockwealth.com.
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March Market Update
Mon, 3/14 4:26PM • 3:14
SUMMARY KEYWORDS
portfolios, inflation, bond, managers, duration, consumer durables, markets, war, expectations, investment, Russia, Ukraine, volatility, categories, growth, long-lasting impact, energy, investment portfolios, BCI, inflationary pressures
00:04 – The calendar year 2022 has kicked off with the return of equity market volatility, which can always be unnerving. The primary drivers of this volatility appear to be inflation and the fact that inflation is rising faster than expectations and of course the Ukraine Russia war. Let me first address inflation.
00:25 – Inflation in the US rose above expectations in January to 7.5%, compared to the period 12 months prior. However, it is still the case that most of this excess inflation since the start of the pandemic has been driven by a handful of categories including energy, motor vehicles and other consumer durables. Most economic research we read is of the view that a resolution to the supply constraints in these particular categories will provide significant relief from inflation sometime from mid-2022 onwards.
01:00 – In regards to this inflation, there are a number of considerations for portfolios. Firstly, it is worthwhile remembering that your portfolio is well diversified with a range of investments that we would expect to have a low level of correlation with each other. This means that we wouldn’t expect them all to move in the same direction at the same time. We have a mixture of growth style equity managers and value style equity managers and after a long period of being out of favour, it is our expectation that value style managers will perform well in this part of the market cycle. Our bond fund managers are able to adjust their portfolio duration. Duration is a weighted measure of the length of time it takes a bond to repay an investor and the longer the duration, the more sensitive a bond is to interest rate risk. Many of the bond managers that we have been reducing duration to make sure that their portfolios of bonds are less sensitive to increases in interest rates. We also have exposure to credit funds within your portfolios. These are important to hold because many of the credit fund managers have exposure to more floating-rate bonds, or variable rate bonds, which again should benefit in an increasing interest rate environment.
02:18 – This brings us to the Russia Ukraine war, and it’s difficult to know exactly how this will play out in investment markets. We are currently assessing whether we feel there are any immediate changes we need to make to your investment portfolios. However, BCI research has recently highlighted that localised wars have not typically had a long-lasting impact on investment markets or asset price performance. They also estimate that if contained, there’ll be little impact on global growth, which is still forecast to be quite strong over the next 12 months. At this stage, we feel the most likely impact is that it will add to inflationary pressures, particularly as it relates to commodities and energy prices.
03:01 – Thanks very much for listening and remember, ‘never fear, Sherlock’s here.’
