Market commentary: Jun 2022

Portfolio performance

The first six months of 2022 was the worst start to a year for the US share market since 1970 with the S&P500 dropping 21%. Prices for high growth companies fell the hardest - Tesla fell 44%. Inflation, the Russian invasion, and China shutdowns are fuelling concerns about rising interest rates and possible economic recession. Central banks are acting to increase interest rates and have made it clear they will do what takes to tame inflation – even if it does cause a recession. Higher interest rates mean bond investors are demanding higher returns on existing bonds. Bond values have fallen dramatically in response. In summary, all areas of our client portfolios are showing unrealised losses albeit not to the same extent of the market.

Crypto currency and investment mania

It’s no surprise that crypto currency, which was all the rage last year, has completely unravelled with the global market falling to US$1 trillion from a peak of US$3.2 trillion in October 2021 (-69%). Investment manias have always been a regular occurrence in financial markets and often seem ‘insane’ in the rear-view mirror.

Looking back, crypto-mania could well be seen as one of the biggest investment manias of all time. However, although the bubble has burst, that doesn’t mean the end of digital currency - in fact the US Federal Reserve said recently it was considering a digital version of the US dollar. It is more about the control, regulation, and transparency that has been largely absent in the rapid expansion of the crypto market.

What groups of companies are likely to succeed in the years ahead?

For the reasons mentioned in the first paragraph one can see that the investment environment has changed. Always looking to the future, the portfolio managers at Capital Group New Perspective Fund (one of the international equity funds in your portfolio) have identified ten themes for company success. One of them is companies with pricing power that can protect their profit margins by passing increased costs to customers – very useful in the current high inflation environment. Examples are global companies with strong brand recognition like Coca-Cola, companies in the fast-growing video games segment like Microsoft, and companies providing essential services like Pfizer.

Richard Grimes, Director and Financial Adviser