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Client Update - 18th February 2022

Whilst we are carefully watching developments on the Ukrainian border, at this moment in time, I can add no further commentary on investment implications. Suffice to say the world did not believe Russia’s declaration earlier in the week that troops were being removed, indeed US sources quoted the opposite. President Biden has been banging his drum with some vigour in recent hours as minor skirmishes have broken out of the Eastern border in a move it is suggested may lead to an excuse for Russia to push on into the Ukraine. Whilst there is suggestion of diplomatic meetings between US Secretary of State Antony Blinken and his Russian counterpart Sergei Lavrov on the horizon, we will continue to monitor events and their effects on investment portfolios closely. Any resolution will of course relieve some substantial tension in the markets.


Away from geopolitics, in broader investment markets, the funds and stocks that provided the best and most consistent returns in the pandemic continue to be punished. The three main reasons for this are of course high inflation, rising interest rate expectations and a perceived move from a pandemic to a more “endemic” view on COVID, meaning lockdowns and prohibitive social restrictions may well be a thing of the past. We await further news from Boris Johnson on this in a weeks’ time. A pandemic is simply a disease/virus that is spreading globally, whereas endemic status means that the infection is more stable, but here to stay and to be accepted as part of daily life.


Since the great financial crisis in 2008/09, growth has been scarce and therefore investors have paid up for stocks, particularly technology, that is deemed to have significant future earnings potential. As we move out of COVID and economies recover, there is an assumption that there will be more growth around and previously depressed “value” stocks such as banking, materials and travel will recover. Banking stocks are further boosted by higher interest rates and increased profit on lending.


We have seen the phrase lower for longer used for many years now, with regards to growth expectations and interest rates, it is therefore interesting to hear a new phrase for inflation expectations – “wronger for longer” (please excuse the poor English!).


Central banks, especially the US Federal Reserve, have indeed been caught out by inflation not actually being transitory but somewhat more stubborn and elevated, and as a result a more aggressive set of interest rate rises may materialise in 2022, but only back to pre-COVID levels.


In this environment the standout performer has been UK Equities and whilst this performance was not guaranteed as Omicron took hold in December, the UK market has shaken off those concerns well and its old-style economy focus on energy, materials and financials have proved robust in a rate rising environment. We run globally diverse portfolios, where the UK is a key part, however we also have meaningful exposure to other economies such as the US, Europe, Asia and Japan. This global diversity was a boost to portfolio returns in 2020 as the UK suffered from the initial COVID induced lockdowns, but the UK market has produced a positive return year to date, versus the majority of other indexes that have struggled and produced negative returns.


Up until now, the UK has been seen as too value-oriented in a world that favoured growth stocks; too skewed towards important but slower-growing industries such as banking, energy and healthcare; and too risky due to Brexit. But all these negatives are now becoming positives and we have been gradually increasing our UK exposure accordingly.


It will be interesting to see how such a heavily indebted global economy can cope with rising interest rates. Whilst many companies have emerged leaner and stronger from COVID shutdowns, Government debt is at unprecedented levels and higher borrowing rates will affect them as much as the consumer. The longer-term expectation is for deflationary pressures to reassert themselves and supply chains to be fixed, but this is a very interesting investment trend to keep an eye on over the coming months and years. Technology is such a key part of our lives, that this current volatility may just be seen as a healthy market correction of some overblown valuations and quality growth companies with growing cashflows may well return to focus as we move through 2022.

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I thought it would be good to take a short break from the inflation / interest rate issues within the UK and US markets and for this week cast our eyes over to Asia, with particular focus on China and