Factors impacting markets

For the last 12 months, markets have been solely driven by macroeconomic factors and events, which can happen over short periods of time. This means that markets are far removed from fundamentals which is what actually drives returns over the medium to longer term.

This can be best surmised by Benjamin Graham, arguably the father of value investing, who said that – in the short run, the market is like a voting machine (tallying up which firms are popular and unpopular); but in the long run, the market is like a weighing machine (assessing the substance of a company).

Your portfolios have been built with a strong focus on fundamentals given the greater certainty and comfort we have here. Whilst we have some regard for the macroeconomic environment in which we operate in, building and managing a portfolio based on short-term and usually quite sharp shifts in macroeconomic sentiment can be problematic and is not something we and most others profess to have any unique or specific advantage in.

Markets are focused on 3 issues right now  

1. USA inflation and central bank reaction: i.e. how hard the Federal Reserve (Fed) needs to go in terms of raising interest rates, to bring inflation under control; and whether the outcome is a shallow or deep recession.
2. China and covid-zero: China is continuing with Covid containment measures including lock-downs. This has flow on effects in terms of economic consequences and impacts to global supply chains.
3. Europe and energy (i.e. Russia/Ukraine): the conflict has direct impacts on energy costs, broader global energy markets, security and global supply chains.

Market movements on a weekly and sometimes daily basis are being driven by sentiment shifting between: a benign environment ahead whereby current high levels of inflation fall quickly and most of the central bank heavy lifting has been done; versus a more adverse environment where central banks have to raise rates considerably more and hold them at higher levels for longer, in order to crush demand and bring inflation under control.

Given recent changes in data, we consider the benign environment is very possible but without a crystal ball it’s almost impossible to tell right now. That’s because we’re operating in an environment where we are all dealing with the after-effects of 2 years of pandemic lockdowns, some of the biggest fiscal and monetary policy stimulus the world has ever seen, supply chain repair, a war with close proximity to Europe with global energy implications, all whilst the world’s 2^nd largest economy continues with covid-zero policies. An unusual combination of issues to say the least.

As such, portfolio settings are currently balanced between the medium to longer term focus on companies with strong fundamentals that are likely to come out of this period in a stronger position with consideration for a benign macroeconomic environment in the short term. We’re closely monitoring prevailing conditions and data points and remain ready and able to adjust portfolio settings if the more adverse environment plays out.

We remain comfortable with the portfolio settings and allocations; and available to discuss your personal position at any time.