It is tricky to sound confident when Putin has up-ended the world order that we thought we had settled to and markets are going through paroxysms of alternating worry.
Having started the year with central banks getting their act together and saying ‘enough is enough we must tackle this wretched inflation’ - not before time, they were so far behind the curve. Cue a slump in bond markets, the US ten-year moved back over 2% (hadn’t seen that for a while) and UK ten-year to 1.6% (it was below 0,7% in December!) and credit spreads widened. Combine that move with mounting geo-political worries, poor figs from Netflix and then Meta (Facebook) and bang went the NASDAQ, down 17% in a matter of weeks. That wasn’t much fun, essentially all asset classes except oil and commodities getting a thorough kicking.
February had a go at improving in stocks (the quarterly reporting season had been fine, with some exceptions as above). We added a shade to credit (around 1.7%) where we thought spreads had gone too far, e.g M&S 3.75% 2026 at 99, Berkeley Group 2.5% ’31 at 89.9, you get the idea… funded by reducing some v short-dated FRNs. Not much in equity, a couple of small top-ups in quality growth cos, Halma and Croda.
Then we get Putin’s invasion and a general panic in markets and sky-rocketing oil and gas prices. Bonds were quite slow to react for the first few days then yields slumped on 1st March (UK ten-year down to 1.12%, two days later and that yield is back up to 1.35% again! Crazy volatility and markets that are getting less liquid. Credit spreads haven’t moved a lot more after the Jan/Feb shift. Stock volatility is wild, as mentioned t’other day HSBC (3rd biggest in London) stormed up 26% in Jan/Feb as rates rose then back down 14% as everybody began to worry about international payments, hidden Russian exposure etc etc. We talked about the volatility in the oil majors…
After a rough start to the year in January with rising interest rates and inflation, February has taken on a new and truly appalling dimension. I did not expect a full-scale invasion of Ukraine, believing that Putin was aiming to create enough tension to gain concessions, it would appear that I was not alone in this view. Clearly the background of uncertainty has been ratcheted up dramatically with an unfolding human tragedy. The response from Europe and the West has been more impressive than we might have expected, particularly notable being the complete turnaround in Germany.
Bond markets are now torn between the central banks’ tightening cycle in response to rampant inflation and the mounting uncertainty. The Bank of England lifted the base rate to 0.5% early in the month (also allowing it to cease the re-investment of maturing Gilts) and ten-year rates strengthened to 1.6% by the middle of the month (US ten-year rates moved over 2%), but money is now returning to the ‘safe haven’ of government bonds, taking the UK ten-year back down to 1.25%. Volatility in equity markets is increasing all the time, notably at the sector level. Banks are being torn between an improving rate environment and the risks from international contagion, sanctions and disruption to SWIFT. HSBC has been moving 5%-6% per day over the past week.
Unsurprisingly, the price of oil has leapt bringing more inflation uncertainty with it. The UK’s big oil companies have clearly been wrong-footed by this too, BP and Shell are now facing huge write-offs as they withdraw from Russia; the talk is around BP’s stake in Rosneft but the full extent of money that Shell has sunk (and now completely lost) in Sakhalin must be horrendous.
This is a thoroughly uncomfortable time for us all. We consider that the quality of the holdings in our portfolios, with generally high margins and barriers to entry, is such that they can withstand a period of elevated inflation and uncertainty. Moves in a number of areas have been quite irrational in the current febrile conditions and we would expect this to correct over the year. We are not holders of any oil & gas or energy companies in the portfolio, we do not like the long-term capital intensive nature of these businesses or their dependence on energy markets. In the short-term, this has hurt performance relative to markets, we do not think this will be the case in the medium to long-term. We do not invest in Russia or any similar countries.
My hope is that Putin has over-reached himself, underestimating Ukrainian resistance, the strength of the response from the West and the extent to which his actions have brought Europe together. Sadly we won’t know for some while, such crises are ‘lived through’ slowly, and I fear that he will push on with an increasingly nasty war.
I hope that Tenax is sufficiently cautiously placed, clearly we have large proportions in cash/nr. cash and our duration is low. But this is a multi-asset event that is hurting at the moment. We are not making any dramatic moves at present, considering that the uncertainty is just too high, though it is worth remembering that we have some good yields locked-in at these prices, which should accrue to us whatever. History tells us that it is right to buy during a war… hmmm..
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