Market Insights May 2022

While the closing days of May generally had a more positive tone to them, and both equity and bond markets benefited, the month overall was unsettled thereby continuing the pattern seen in financial markets year to date. There is no change in the major factors impacting on markets – inflation, interest rates, economic growth and recession risk. In simple terms the key uncertainty affecting markets at present and the question being asked is whether the US Federal Reserve can successfully manage the very difficult challenge of bringing inflation down while keeping the economic growth rate above zero. If they get it wrong by raising rates too quickly, they risk pushing the economy into recession. If they get it wrong by not raising rates quickly enough, the risk is that inflation gets out of control for a lengthy period.

Added to this scenario, the ongoing war in the Ukraine is leading to tight commodity markets, both hard commodities (energy and metals) and soft commodities (food). And on top of that again, China’s zero covid policy is continuing to affect global supply chains across a very wide range of products.

This picture leads us to believe that we are in for a volatile Summer. The inflation/interest rate story is likely to ebb and flow for a few months yet and financial markets will struggle to find a direction against this backdrop.

On a more positive note, there is no question that value opportunities have emerged over the course of this year and that committing funds to the market now is likely to pay off handsomely over the coming years.

Equity Markets Year to Date (Euro Terms)

Equity Markets

Of the major developed world equity markets, the UK is the sole market in positive territory year to date. Relatively speaking, the UK has been coming off a low base following the post Brexit economic uncertainty which the market is still to a degree recovering from.

Both the high growth tech and ESG sectors, bore the brunt of the market correction over the past nine months or so. While we remain wary of the larger tech stocks, there is certainly value now among some of the technology themes. We also see good value on offer in ESG where valuations had almost certainly got ahead of themselves prior to the correction. Our fund pick this month, the Schroder Global Sustainable Growth Fund, is our primary choice in that space.

Equity Market Performances (percentage change in euro terms)

*Source Financial Times, Financial Express

Bonds

Bonds are at the vanguard when interest rate changes are taking place and it is hardly surprising that bonds have been generally weak in 2022 to date. Sovereign bonds and investment grade bonds tend to be most responsive in this kind of environment. However, many higher yielding areas of the bond market have been less sensitive in comparison. Because of their capacity of provide good income compensation at a time when interest rates are still low and inflation is rising, we continue to see some of the higher yielding niche areas as offering something for investors.

Property

While Irish residential prices show no sign of peaking, Irish commercial property looks reasonably fully valued in our view. Internationally, however, there are still very good value opportunities available in property, with many funds continuing to trade at sizeable discounts while also offering very decent levels of income. If we accept that property is also a good inflation hedge, then there are certainly very strong arguments for a property exposure in most portfolios.

Other

Over the past couple of years, Harvest has been steadily increasing the range of alternative funds on our Recommended Buy List. These include funds involved in renewable energy, infrastructure, asset-backed finance, private equity etc. since the beginning of the year, many of these selections have materially outperformed equity markets and we believe that this contrarian performance pattern will continue for a while yet. Many of these opportunities also offer very attractive yields as well as having some inflation hedging characteristics.

As always, you should only consider the investment views contained in this Market Insights update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact Harvest Financial Services on 01 2375500 or email justask@harvestfinancial.ie.