The shocking events unfolding in Ukraine have put investment considerations very much into second place. Like others, we’ve been preoccupied by the scale of the human tragedy, the bravery of ordinary people in the face of extreme danger, and thoughts of how we might be able to help.
Meanwhile, we are entering uncharted territory when it comes to the impact of the war and the associated sanctions on the global economy and supply chains. Inflation, which was already running hot, is set to get a further boost from soaring prices for oil, gas and wheat – all of which have been repeatedly hitting multi-year highs.
Higher levels of inflation have already begun to affect market demand, as can clearly be seen by comparing the average discounts of the Technology & Media and UK Equity Income sectors since the beginning of the year. The attraction of (relatively) stable dividend streams over promises of future growth has been the subject of extensive comment.
Earlier this week we heard from four investment company managers on the outlook for inflation. Charlotte Yonge, assistant manager of Personal Assets Trust (PNL), explained how the company combines four assets – equities, index-linked bonds, gold and cash – to try and preserve the real value of investors’ capital.
In Yonge’s view, it is not “nailed on” that higher inflation is here to stay, but there are signs that wage inflation is being boosted by increased bargaining power among workers. This raises the risk of the dreaded wage-price spiral, which is what Bank of England governor Andrew Bailey was referring to when he made his controversial comment that workers should moderate their selfish demands for wage increases for the greater good.
Without wage inflation following prices, inflationary pressures in the economy could quickly subside. So this indicator is being closely watched. Yonge points out that the political backdrop is not favourable to those like Bailey urging wage restraint – witness the fury that followed his comments, or President Biden’s 4.6% pay rise for US federal employees, the biggest for 20 years.
The wage-price spiral has two elements, of course – wages and prices. If companies are successful in passing on increases in the cost of raw materials, that drives demand for higher wages.
Turning the screw
Meanwhile a question mark hangs over interest rates. While the outbreak of war in Europe could give central banks cover to slow the pace of monetary tightening, Chancellor Rishi Sunak said this week that the UK economy was vulnerable to higher inflation and suggested tough decisions would have to be made.
Financial stocks traditionally benefit from interest rate rises. Nick Brind, manager of Polar Capital Global Financials (PCFT), points out that the earnings of banks are very sensitive to rising interest rates and bond yields. If inflation does not return to pre-pandemic levels, he adds, he would expect central banks to raise rates higher than currently expected by markets, benefiting bank stocks.
Of course, no-one knows whether disinflationary effects of the war in Ukraine will ultimately overcome the more immediate inflationary ones. Nick Brind also reminds us of JK Galbraith’s wise words about forecasters, who fall into two categories: those who don’t know, and those who don’t know they don’t know.
Investment companies have a long history of surviving market turmoil, including wars. Last month, we released a list of “platinum” investment companies that have been around as long as the Queen and just this week we have put out a ranking of the 30 investment companies that would have generated more than £1 million for someone who invested their entire ISA allowance each year in each company since the tax-efficient savings scheme was launched in 1999. It should be clear that we are not recommending this as an investment strategy, just as an illustration of the power of long-term investing. In times of uncertainty, diversification remains the best bet.
Women leaders
It was heartening to see from the FTSE Women Leaders report that investment companies are leading the way when it comes to female representation on FTSE 250 boards. There is still much to do, both when it comes to gender and other forms of diversity. Faith Glasgow has written a particularly comprehensive piece on why there aren’t more female fund managers, with comments from well known women in the sector such as Sue Noffke of Schroder Income Growth (SCF), Abby Glennie of abrdn UK Smaller Companies (AUSC), and Winterflood’s Emma Bird. It's an insightful read.
A final piece of good news – Defaqto has now launched a ratings service for investment companies. Our regular writer David Prosser assesses the impact this might have on the sector.
Nick Britton.
Head of Intermediary Communications.
