It’s been an interesting few weeks for investors that’s for sure. Inflation has carried on ticking higher, with the pincer movement of higher energy and food prices increasingly bearing down on consumers. Central Bank rhetoric has changed to acting tough on inflation through raising interest rates further and faster, and bond markets have taken fright with yields rising and prices falling.
The US ten-year government bond yield rose to not far off 3%, having been less than half of that throughout much of last year. In the context of normally sedate bond markets, this is a big move, and it comes with significant consequences, notably higher borrowing costs for consumers and businesses.
A mixed picture for shares
Share markets held up fairly well for much of the month, perhaps seen as the ‘least worst’ option when it comes to coping with inflation within portfolios. Company cashflows adjust – unlike nominal bond coupons – to higher prices, as do balance sheets. However, the picture is a mixed one. Companies with ‘pricing power’ can pass on increased input costs and preserve profit margins. Others even directly benefit such as companies extracting energy and natural resources, which presently are a significant source of the underlying inflation. However, some other businesses face an unappealing cocktail of higher input costs, escalating wage demands and the inability to pass costs onto customers without killing demand.
Consequently, there has been a significant disparity between the winners and losers in this changing environment. Commodity and resource funds lead the way for much of the period before succumbing, in dramatic style, to news of the spreading Covid lockdowns in China. This threatens to crimp growth in the world’s second-largest economy, and thereby demand for raw materials. Investors have to balance apparent excess demand within these areas in the near term with the possibility of this falling away markedly.
Tech and China out of favour
It was a further testing period for highly-rated tech stocks, especially those disappointing investors with their trading updates. An unexpected drop in subscribers sent shares in Netflix, the streaming giant and lockdown ‘winner’, sharply lower, forcing the company to consider experimenting with ads and cracking down on people sharing passwords with friends or family.
The wider ‘FAANG’ group of tech companies, Meta (formerly known as Facebook), Amazon, Apple, Netflix and Alphabet (the parent company of Google) were some of the best investments during the pandemic but have now fallen firmly out of favour. Meta and Netflix in particular, illustrate what can happen when companies don’t meet investors’ lofty expectations. For growth stocks more generally, even strong earnings and projections haven’t led to upward momentum as investors tend to demand a lower starting value if inflation is going to be higher.
In China, share markets have also seen an ebbing of investor sentiment as increasing lockdowns of uncertain duration threaten to derail growth. The anti-epidemic policies challenge the notion that authorities cannot and will not allow growth to slow to below its target. Beijing’s “zero-Covid” policy remains significant globally because of its impact on supply chains and, potentially, inflationary pressures. Headline inflation is therefore not expected to peak until the second half of the year, even if commodity prices recede.
Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for April 2022 in full:
Top 10 funds:
Bottom 10 funds:
Top 10 sectors:
Bottom 10 sectors:
Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for April 2022: 31/03/2022 to 30/04/2022. Onshore and retail open-ended funds only.
*There are several thousand funds on sale in the UK. The Investment Association divides these into over 40 ‘sectors’, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.
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