Market commentary: May 2022

Portfolio returns

The investment landscape continues to be volatile with the main concerns being high inflation and the Russian invasion of Ukraine. Company profit and forecast releases have been keenly awaited by the market and profit announcements that haven’t met market expectations have been punished with large sell offs. Bond prices remain low and therefore current yields are high. There’s a sense that the bond market has overreacted to high inflation and that now is a very good time to buy bonds. Negative returns for shares and bonds over the last 6 months have dragged our client portfolio returns for the full year into negative territory. Property and cash provided some respite with positive returns.

High inflation

Inflation is usually seen as result of excessive demand pushing prices up, but this time pressure is coming from both demand and supply. Demand for goods and services is strong and has recovered back to pre-pandemic levels as the world reopens from the depths of COVID- 19. Supply of goods and services is tight due to supply chain constraints and the lingering effects of the pandemic - further exacerbated by the invasion of Ukraine.

Central banks are taking action to reduce inflation by raising overnight cash rates (to force trading banks to increase their lending rates) and reducing the supply of money to economies. This is the reverse of the past 14 years where central banks lowered overnight cash rates and added money to economies to keep interest rates low.

Infrastructure

As inflation accelerates worldwide, rising input costs and higher borrowing costs are reducing company profits, and the lower the expected profits the less people are willing to pay for shares.

Many investors are turning to companies that are renowned for their inflation protection. Among these are infrastructure companies, defined as companies that provide services that are essential for the community to function efficiently and behave like monopolies. Examples are; utilities, toll roads, airports, railroads, energy infrastructure, and communications infrastructure.

Infrastructure companies often have contractual arrangements with regulators that include the ability to increase prices for inflation, minimum rentals that are inflation linked, and, in some cases, lighter regulation.

Richard Grimes, Director and Financial Adviser