All of our clients will know that we often start with the FTSE 100 when considering how well or poorly their portfolios have performed. The FTSE 100 index is the largest 100 companies in the UK, listed on the London Stock Exchange.
It has always been quite a good indicator of global performance, as it historically has moved around in line with U.S, European and Asian stock markets on a daily basis. This is never an exact science – but it is a good starting point.
Over the last few years, we have started to see a real divergence by the FTSE 100 against its global market cousins. I would personally say that ‘Brexit’ (or the lack of confidence in our countries governance and progress) was the catalyst that seemed to cause the FTSE 100 to start to lag behind other indices such as the American Dow Jones index.
The uncertainty that surrounded UK equities led to many stocks within the FTSE becoming undervalued.
In addition to this, the FTSE 100 no longer lists the big global players. The mega-stocks of recent times have been the likes of Apple, Microsoft, Amazon and Netflix. These are all listed in the US and are commonly known as ‘growth’ stocks because they pay very low dividends and investors hold them to achieve capital growth.
The FTSE 100 is made up of many companies now known as ‘value’ stocks such as Oil or Tobacco (for example). These are companies that may have fallen out of favour in past years, they also are not ‘on trend’ in terms of being potentially socially responsible or ‘ethical’ stocks.
However, something has spooked the ‘growth’ elements of global markets.
This is the sudden acknowledgment by the US Federal Reserve (Central Bank) that they are looking to push interest rates upwards throughout 2022 to try and combat inflation.
This has caused these mega-stocks to suddenly look less attractive, as they may have to service debt with rising interest rates. Also, their traditionally low dividends are suddenly a problem when inflation demands a higher level of income. With interest rates potentially shooting up – investors are temporarily ‘rotating’ away from these growth stocks to value.
Value stocks tend to pay higher dividends to attract investors who might not normally consider them.
This explains the sudden rise in fortunes of the FTSE 100.
So whilst many global markets have lost some of their profits in January, our domestic ‘value’ led FTSE 100 index is shooting up. This is a bit of a weird one.
Our clients will be very aware that their portfolios have enjoyed a stellar run throughout the past 18 months. This has been especially evident in the Ethical portfolios, where Oil has been specifically excluded and growth stocks have been the order of the day.
Our Mainstream portfolios do include some ‘value’ funds, but ultimately they will be skewed towards higher quality underlying stocks. After all, who wants to really hold shares in companies that are unsustainable long term?
There are two questions we have to now ask ourselves, these are:
The answer to this is a resounding ‘no’. We do not advocate completely throwing out 70% of our clients funds just because they contain a higher weighting of ‘growth’ stocks that are temporarily unpopular.
2. Is this rampant inflation going to keep rolling forward?
I mentioned in my market review, six weeks ago, that many companies have double or even triple ordered component parts for their supply chains. Interestingly, December 2021 saw the sharpest slowdown in supply chain inflation since November 2020. The used car market in the UK is just starting to show its first signs of falling prices. There will come a point where supply outweighs demand and inflation naturally drops back.
Central banks are limited to the use of crude interest rate rises to try and ‘narrow’ the money supply in our economies. However, all of our information is currently telling us that small 0.25% rate rises will realistically do little to bring sectors such as the housing market under control. I think they know this and so the threat of interest rate rises is probably more effective than the actual thing in cooling ‘run away’ economies.
So what does this all mean? Why am I telling you about this and what are we planning to do about it?
Well, in short, your portfolio will look considerably better off vs. the FTSE 100 over the past two years. However, in recent times, the FTSE 100 has enjoyed a resurgence whilst your portfolio has either stood still or even lost a little.
This is completely understandable, as everything goes in cycles and we always expected some ‘froth’ to come off the top of portfolios at some point. They had simply done so well.
Good quality companies with a highly developed and sustainable business model are still going to be the long term winners. Recent falls in funds that contain these holdings present a fantastic buying opportunity.
We are watching the portfolios very closely and if we can see one or two tactical moves that could suit your holdings – we will be in touch either slightly before or on the next quarterly review in six weeks’ time.
We have real faith in our structured quarterly review system, it works brilliantly and keeps us sane!
We receive considerable levels of information about markets and stocks which mean that we are currently very confident with the way that our client’s portfolios are positioned after very careful and diligent consideration.
I just wanted to reassure you that we are on to this and our considered research is telling us that this divergence is likely a fairly short term ‘blip’ that we would expect to see correcting by the close of this year.
As ever, we are here for you 100%. If you need anything at all or you have any concerns, just call us. You are our priority.
My very best wishes indeed
Darren
