Market commentary: Nov 2021

Over the last few months share markets have risen further on the back of global economic recovery and hopes that the impact of Covid-19 is beginning to recede. Interestingly, the appearance of the Omicron variant while rattling markets hasn’t dented the broadly positive sentiment. Investors are expecting strong economic growth to boost the market to further highs. However, there are niggling concerns. The main ones being rising interest rates, and a mutation of the Covid-19 virus that eludes the vaccine.

In light of this, shares and property provided all the return in client portfolios over the last year. Fixed interest investments (bonds) lost value as central banks increased interest rates (to curb inflation) and investors priced in further increases.

Investment philosophy

The outlook for the next 12 months is impossible to predict. We could see further gains on share markets or a major correction. There is a convincing case for either outcome. Few people seem concerned about the risks that are evident and as one manager put it “hiding in plain sight”. An example is the meaningful risk that high inflation is not temporary as many predict, and central banks are forced to increase interest rates. If this were to eventuate, we could witness a major correction in share markets. Our fund managers are prudent and recognise this risk. They are taking action to make their portfolios more resilient to inflationary pressures and higher interest rates. A great example of rational, fact-based decision making, and not getting caught up with what other people are saying or doing.

Company profile: Netflix

Netflix is one of the 10 largest holdings in the Capital New Perspective Fund and Magellan Global Fund. Both of which are in our client portfolios.

The company is the pioneer for watching TV shows and movies over the internet in a personalised way. Founded in 1997 as a DVD rental service it moved to online hire and by 2016 introduced its first original series and its streaming service became global.

Fund managers like the streamed content market as it is easily scalable and as more households join, established providers have revenue to expand content offering making it harder for new entrants. Netflix is the preferred investment in the market as it has built the reputation as the ‘must have’ basic offering and it has more subscribers than its competition.

Fund managers always consider the risks. For Netflix they include low switching costs making it easy for subscribers to change providers, and the challenge of spending its growing content budget wisely to add value to the business.

All things considered, fund manager analysis indicates Netflix is well positioned to deliver attractive investment returns for at least the next 5 years.

Richard Grimes, Director and Financial Adviser