Market commentary: Oct 2022

Portfolio performance

Inflation continues to be stubbornly high and central banks around the world (except for China) are taking steps to force interest rates higher to dampen demand for goods and services and thereby bring inflation under control. Investor sentiment regarding the short-term outlook for businesses is negative and there are fears of economic recession. In this environment it’s no surprise that market prices for shares and bonds have fallen. This shows up in our client portfolios as unrealised losses - a problem if you need to sell but a good time to be buying. Our client portfolio returns are negative for the year to 31 October but not as negative as the overall market. As a comparison, the return of combined world share markets for the year was -22.8%. For our clients, it’s worth noting that cashflow from interest receipts will continue unaffected during this time and will increase as interest rates increase. Also unrealised losses on bonds will reverse as bonds mature and the principle is repaid.

Why high inflation is bad for the economy

At its simplest, inflation can be described as too many dollars chasing too few goods and services. Cheap borrowing leading to too many dollars, and supply chain constraints have caused historically high inflation. The primary, and most pervasive, effect of inflation is the erosion of consumer spending power - a dollar now doesn’t go as far as it did a year ago. High inflation feeds on itself as employees demand larger wage increases and employers pass on these costs by raising prices setting off a wage-price spiral. Inflation is difficult to get rid of and portends the danger of economic recession as consumers reign in spending, unemployment increases, and central banks are forced to increase interest rates.

Tech trifecta

The job of fund managers is to understand fundamental growth dynamics of an industry that can drive long term returns. Semiconductors, cloud computing and software are a trifecta of interconnected industries that fund managers are following closely. Semiconductors (essential component of computer chips and microprocessors) are found in computers, smartphones, appliances, and cars. Today a new car uses as many as 3,000 computer chips. Semiconductors are also considered the backbone that cloud technology companies (who offer information technology as a service through the internet) use to power their businesses. If semiconductors are the backbone of the cloud, then software is the brains that is driving advancements in e-commerce, healthcare, education, transportation, construction, and agriculture. The growth dynamics of this ‘trifecta’ indicate strong and resilient demand for many years to come.

Richard Grimes, Director and Financial Adviser