Market commentary: Jul 2022
Portfolio performance
After a decade of global quantitative easing to keep interest rates at historical lows, the last 6 months have seen central banks switch direction to quantitative tightening and monetary policy to increase rates. This has impacted negatively on both share prices and bond prices globally and, with the expectation of interest rates rising further, short-term investors are concerned about possible economic recession. All investment classes in our client portfolios are showing losses - albeit less so than the overall market. The MSCI world index (measures the return of all global share markets combined) is down 13.02% for the year. Higher interest rates are causing bond prices to fall creating unrealised capital losses. These losses will be recovered over time as bonds mature and the full value is repaid.
Adjusting to rising interest rates
Historically low interest rates have arguably been the single biggest driver of world share markets in recent years. But the tide has turned, and central banks are forcing interest rates up as they focus on beating down high inflation. The global investment environment is further complicated by geopolitical issues (Russian invasion, China v US), social issues (mounting pushback against inequality), and climate change (prospect of enormous costs of remediation and mitigation). With this increasing pessimism over the growth outlook, long term investors are looking for companies that will be resilient and can benefit in such conditions. Examples include high quality companies that can pass on cost increases, banks that will benefit from higher margins as interest rates rise, companies involved in the decarbonisation of transport, and the health care sector.
Investment theme - Healthcare innovation
Life changing drugs are being developed and approved faster than ever. Health care innovators are developing therapies designed to engineer how the body recognises and treats disease itself. These treatments have the potential to extend lives and generate billions of dollars for the companies that are able to develop them successfully. A massive wave of innovation from health technology companies has led to improved diagnostics, tests for early detection of cancer, remote patient monitoring and home diagnostics. Our international managed funds invest up to around 15% in this sector including companies like Novartis, Merck, Proctor & Gamble, Reckitt, and Abbott.
Big market moves punish good and bad businesses alike – for long term investors with emotional discipline this presents an opportunity.
Richard Grimes, Director and Financial Adviser