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.
Looking forward, the vast monetary and fiscal stimulus unleashed by the central banks in response to the pandemic is steadily being withdrawn. This will continue to take an inevitable toll on asset values. Where we differ from current consensus is that we believe that interest rate rises will slow the economy much quicker than they did in past economic cycles as the amount of debt within the financial system is much higher. With this in mind, we are likely, therefore, to experience a shorter but more brutal market correction than many commentators are predicting. The majority of the gains we enjoyed post Covid have already been lost and market participants are already acting cautiously. It is difficult to recall the last time we heard a truly positive commentary. It is likely that we have already experienced the bulk of this cautious phase but there potentially remains scope for some gut wrenching falls before we are past the worst. That said, early stage growth companies, that have traditionally been expected to grow at a faster rate than the market average, still feel like a bubble where some air still needs to escape.
Turbulent markets can have a tendency to throw up opportunities. Given the historically large discounts which can be found in the closed-ended sector, there are plenty of investment trusts that have the potential for a dramatic re-rating, when the manner in which potential investors view the trust itself changes. We do expect more market volatility to come as the global economic headwinds put pressure on markets. At the time of writing, we have seen most companies fall in unison. With regard to the mining sector, the wheat has yet to be sorted from the chaff. Once the difficulties from inflation and rising interest rates start properly feeding through into company results, we may see a divergence between those with stronger underlying portfolios and we are constantly monitoring where these potential pitfalls could be. One of the advantages of the closed-ended world, in our opinion, is the variety of investment types now available to us. This means that we can potentially have more opportunities to choose from. There will always be sectors that are hot, where investors have already priced in the good news, and those under the cosh, where fears are fully reflected in the market price. A recent example would be how we sold out of the booming shipping industry and recycled the money into the friendless biotechnology sector. Challenging conditions often create the foundations of the next positive market run and we believe that we are well positioned for these, whilst remaining patient in our approach.