As we exit the Summer lull period for markets, the issues occupying investors’ minds are unchanged. How high is inflation likely to rise? How sticky is the inflation rise likely to be? How far will central banks push interest rates? Will central bank efforts be successful in taming inflation? Will these efforts tip economies into recession? And all of this uncertainty is just not good for financial markets. Both bond and equity markets have delivered volatility levels this year well above the norm and investors can expect more of the same over the coming months – or at least until the economic picture clarifies.
The energy situation in Europe is a particularly acute challenge and has the potential to create some serious short term issues for European economies over the coming winter. On the other hand it is leading to a considerable acceleration in investment plans around alternative sources of energy.
The EU Commission estimates, for example, that new wind farms planned for the Baltic Sea region could ultimately power more than 100 million households. In our view, this is creating very substantial opportunities for investors in the areas of solar, wind and battery storage. Not alone do these sectors offer attractive capital growth opportunities but they can also be very reliable sources of investment income, while also offering daily liquidity. We believe all investors should have an exposure to one or more of these sectors in their portfolios.
Having delivered a strong recovery in July, equity markets slipped backwards again in August. Ireland and China were the two exceptions to the trend, both coming off low bases relative to other markets. As mentioned above, this pattern of volatility is unlikely to change in the short term. In addition, we feel that, while it is still not a likely event, the risk of a correction over the coming months has risen. All of that said, we are not fighting shy of equities although we are being quite selective and we are phasing new investments into the market.
Equity Market Performances (percentage change in euro terms)
|Market||Performance Aug 2022*||Performance 1 year*||YTD*|
*Source Financial Times, Financial Express
Once the inflation story took hold in 2020, mainstream bond markets were assured a challenging time, given the very direct exposure of bonds to movements in interest rates. That said, not all bonds have performed badly and some unconstrained global bond funds on our recommended list e.g. Templeton Global Bond Fund (+5.5% year to date) have performed against the grain and are in positive territory over the course of 2022. Continued rate increases will bring further volatility to bond markets so, as an asset class, it is important to be highly selective.
If history is anything to go by, property could be a beneficiary of current inflationary trends because of the general tendency for rents to follow general price increases. Currently, we favour international property markets over Irish-based opportunities on a relative value basis.
Over the past couple of years, we have been steering clients towards having a larger allocation to alternative asset classes, away from mainstream equities and bonds. We have particularly favoured infrastructure and renewable energy funds. Both of these asset sub-sectors have performed positively in 2022 to date, bucking the general trend in the main asset classes. We continue to favour these sectors and would expect them to continue to perform relatively well in the current uncertain marketplace.
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 email@example.com
This marketing information has been provided for discussion purposes only. It is not advice and does not take into account the investment needs and objectives, financial position, risk attitude, liquidity needs, capital security needs and/or capacity for loss of any particular person. It should not be relied upon to make investment decisions.
Warning: The return may increase or decrease as a result of currency fluctuations.
Warning: The figures refer to the past. Past performance is not a reliable indicator of future results.
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