It’s time for a visit to the US (and elsewhere)

Neil Birrell

Premier Miton's Chief Investment Officer

This update should not be taken as advice. If you are unsure about any of the content please contact your financial adviser. Please remember that the value of stock market investments will fluctuate and investors may not get back the original amount invested. To assist, where appropriate, a glossary explaining some of the terms used has been provided at the end of this update.

When I sit down to write this update note each month, or sometimes more regularly if events dictate, I am rarely short of topics to discuss. To such an extent, I worry about it being too long. This month is no exception, in fact, it’s worse, there has been so much going on. So, I have decided to try and keep this punchy (may have failed already!) and blog-like, covering a number of topics, but briefly. They are all inter-related anyway.

I’ll focus on the US, it is the world’s largest economy and most important bond and stock (equity) market.

The US dollar is popular and sterling isn’t

In April, sterling suffered its worst month against the US dollar since October 2016, just after the Brexit referendum. Back then the outlook for the UK economy was poor and that is the case today as well. However, we are now faced with the spectre of high inflation, high energy prices and rising taxes; that is not a good combination for the economy and the consumer in particular. The Bank of England needs to put interest rates up to combat inflation, but that is likely to slow the economy further; quite a balancing act. Whilst rising interest rates should support sterling, the other factors outweigh that. In fact, a lower pound makes imports more expensive, oil for example, and that is more inflationary.

In the meantime, the US economy is relatively robust and interest rates are likely to rise further and faster, making the dollar attractive. It’s not surprising that we have seen such a big move in the exchange rate. 

Is it all over for the big US technology companies?

The extraordinary share price rises of a number of very large US technology companies over the past decade has led many to draw comparisons with the “Tech bubble” that burst just over 20 years ago. There are indeed many similarities, but also many differences; the big difference is that this time the actual businesses of the likes of Facebook (Meta), Amazon, Apple, Netflix and Google (Alphabet) are real, it is just their share valuations that look unreal.

They have got to such a level that there is considerable risk to their share prices. They were hit hard in April, through the company results reporting season for the first quarter of 2022. Netflix fell precipitously after it announced its subscriber numbers were falling and changes to its pricing model. Amazon lost $206 billion off its market value the day after its results. This was only beaten by Facebook losing $251 billion in value. It all added up to the technology company laden NASDAQ 100 Index losing over 13% in April, its worst month since October 2008, in the midst of the global financial crisis, with even Apple and Microsoft both down 10%.

It’s not the end of these companies, but it might well be the end of the domination of their share prices.

The rest of the US equity market has been volatile

The S&P 500 Index is a much wider gauge of the US stock market, although the large technology stocks are part of it. Through April it had 4 straight weeks of declines, being down nearly 9% in the month, partly due to results announcements, but mainly because of the huge uncertainty we face in the economic outlook.

This uncertainty breeds volatility. In the last week of April, the index was down 2.8% on Tuesday, up 2.5% on Thursday then down 3.6% on Friday. This is indicative of the very high level of uncertainty, even nervousness over the short term outlook.

Bond yields have risen a long way, how much further can they go?

Bonds are valued on their yield (the interest rate paid, divided by the price of the bond, expressed as percentage) and the yield is used rather than the price to describe value and movement. As the price falls, the yield rises and vice versa. The US government bond (Treasury) market is taken as the best indicator of global bond markets, with the bond that matures in 10 years used as the benchmark.

The yield on the 10 year Treasury has risen to 2.94%. To put some context on that, it was 0.51% during the pandemic. That translates into a significant fall in price. The high levels of inflation, economic recovery from the pandemic and the rising interest rate environment have driven this. Bond yields will have factored in future expectations and central bank policy will be key to what happens next.

Central banks

The US Federal Reserve announces any change to interest rates on 4 May and the Bank of England on 5 May, so by the time you read this, interest rates will be higher than they are on the day I am writing it (2 May). In the case of the US, almost certainly an increase of 0.5%, and they will be going further up through the rest of the year.

The only question in my mind is; will they go as high as is currently expected? I think there is a good chance that the answer that is no, because economic growth may well start to slow faster than expected given the price rises we are dealing with. If that’s the case, inflation will be falling as well and maybe bond yields will start falling again.

Should we worry about China?

Yes.

The Chinese economy is crucial to world trade. We have seen what lock down measures can do to an economy, if COVID impacts China in the same way, the global economy will suffer. The government is acting to provide support, but we need to keep an eye on events there.

Ukraine

If the rumours are true and Russia does declare all-out war on Ukraine, it has very significant ramifications.

Firstly, we have to fear for the Ukrainian nation.

It enables mass mobilisation of the Russian population to join the war and Putin could declare martial law which would allow the closing of Russian borders and nationalisation of the economy; Soviet style measures. Physical assets owned by non Russians could also be seized easily. 9 May seems to be the likely date, as it is the date marking Germany’s defeat in World War II. This would be bad news in many ways and suggests that this could be a conflict that lasts for some considerable time.

Time for some good news

Warren Buffett is widely considered to be one of the greatest investors of all time. He has an approach that focuses on value, or buying cheap assets, particularly when investing in stock markets. His investment company is called Berkshire Hathaway, which has been selling US equities for the past 2 years. It appears that his view has changed with over $50 billion being put into US equities in the first quarter of 2022. If the world’s greatest investor sees value, who are we to argue?

Short term versus long term

I would caveat that, with; Buffett isn’t always correct and he is a very long term investor.

In the short term, financial markets have many headwinds to cope with. There may well be considerable volatility and downside to prices, either a sharp fall or a slow grind down. But that provides opportunity for the long term investor and active management of assets in this environment allows us to protect against downside and take advantage of upside opportunities.

The last word

At the start of this the aim was to keep it shorter than usual (failed) and to cover a number of topics (passed). Let’s see how May goes.

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Risks

The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested. Reference to any particular stock does not constitute a recommendation to buy or sell the stock.

The performance information presented in this insight note relates to the past. Past performance is not a reliable indicator of future returns.

Government and corporate bonds generally offer a fixed level of interest to investors, so their value can be affected by changes in interest rates. When central bank interest rates fall, investors may be prepared to pay more for bonds and bond prices tend to rise. If interest rates rise, bonds may be less valuable to investors and their prices can fall.

Equities (shares) can experience high levels of price fluctuation.

Future forecasts are not reliable indictors of future returns.

Glossary

Assets

Different groups of investments such as company shares, bonds, commodities or commercial property.

Physical asset

An asset is a resource with economic value that an individual or corporation owns or controls with the expectation that it will provide a future benefit.

Bonds (or fixed income)

Types of investments that allow investors to loan money to governments and companies, usually in return for the offer of the pay-out of a regular fixed amount of money until the bond’s maturity date, plus the return of the original value of the bond at a set maturity date. The price of bonds will vary and the investment terms of bonds will also vary.

Bond yield

This is calculated by taking the level of interest paid by the bond, divided by the price of the bond, expressed as a percentage. As the price rises, the yield falls and vice versa.

Equities

Another name for shares (or stock) in a company.

Index

An index is a method of tracking the performance of a group of shares, bonds, other assets or factors. For example, the FTSE 100 Index is made up of the 100 largest companies on the London Stock Exchange.

Share price

The amount it would cost to buy one share in a company; it is not fixed but fluctuates according to the success of the company and market conditions.

Volatility

A measure of the frequency and severity with which the price of an investment goes up and down.

IMPORTANT INFORMATION:

The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the content of this document, please speak to a financial adviser. The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.

Whilst every effort has been made to ensure the accuracy of the information in this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or fund does not constitute a recommendation to buy or sell the stock or fund.  Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, we may monitor and record calls for training and quality-assurance purposes.

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227.  Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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