Annus Horribilis

Investment director Paul Tyndall reviews one of the most challenging years of his career to date.

by Paul Tyndall

Investment Director


Turning first to the UK political scene, at the time of writing the Tory leadership is a debate about unfunded tax cuts (Maggie would not be amused).  These cuts would only make our national finances even more precarious in my view and possibly increase the pace of rising interest rates.

To my mind, the most important issue barely gets a mention: productivity - getting more done each year with the same amount of human and physical capital.  This is the very essence of what raises incomes and ultimately pays for more schools and hospitals.  Productivity and real income growth have been stagnant in the UK for 12 years and we have dropped significantly behind most Asian countries, America and the wealthier European countries such as Germany, France and Holland.  Sadly this is one reason why I think it is essential to have exposure to overseas stock markets.

Looking ahead, this winter is likely to see an oil and gas energy crisis as Putin turns off the taps as a tool of war with the West.  This may succeed in fracturing the unity of the coalition and improving the eventual terms for Russia of a negotiated settlement.  There are many ways politicians could be encouraging energy efficiency, such as not driving over 60mph and turning down thermostats in offices.  Material changes in just these two areas could reduce energy use by 10% per annum and also show some solidarity with Ukraine.  Europe will be hit much harder than America and Asia if this threat comes to pass.

A quick aside on the futility of short term forecasting; the prices of oil, wheat and copper have fallen substantially in recent weeks and one of the strongest currencies in the world this year is the Russian rouble!  The credit for the latter point goes to Elvira Nabiullina who runs the Russian central bank.  She’s done much more for the Russian war effort than the over-decorated generals.

In terms of discerning the contours of the year ahead, on markets, all roads lead to inflation and in particular American inflation.  Wage settlements continue to be well below the level of inflation and crucially, high inflation expectations are not entrenched and are actually heading down.  In my view, US interest rates will keep going up until inflation starts coming down; likely this autumn.

Attention is now shifting from inflation to the possibility of recession as a consequence of rising interest rates.  A recession is possible but not a foregone conclusion and also any recession is likely to be mild in comparison to 2020.  Needless to say, recessions are sometimes essential but never welcome and can lead to losses on markets.  (2020 was anomalous in terms of the most severe recession in a century and a good year on markets).

These certainly feel like the worst of times.  In terms of markets I think inflation is priced in but maybe not recession.  Markets tend to move ahead of events and the likelihood of recession should be evident in the next three to six months.  Asset prices certainly look very attractive and in my view we will see the foundation to a new bull market between now and Christmas.

What has gone wrong in 2022?

I will answer by first revisiting my core investment principles that have served my clients well over the decades.

Most investors make decisions based on short term thinking. I ponder the long term and in particular positive and negative trends that will reshape economies and business. I position portfolios accordingly. This sometimes means being too early and therefore patience is essential. When big shifts do eventually happen they tend to be bigger and quicker than expected. Electric vehicle adoption is a good example.

Behavioural finance is the term used for the psychology of investment. Humans are riven with mental and physical impulses, some good and many bad. These cloud judgement.  Herding, over-trading, over-confidence, selling too early and falling in love with stocks are just some of the follies that befall a lack of discipline.  Markets like stuff you can measure, and you can’t measure emotion so it is disregarded and too much value is placed on just the data.  A wine list gives a lot of information, but it’s the tasting that gives the full picture.

I like companies that are easy to understand with strong balance sheets, high return on capital, high margins, strong intellectual property, high levels of research and development and a tangible and exceptional culture.  There are times like these when market participants prefer companies with weak balance sheets, low barriers to entry, mediocre management and low margins. These companies did badly in 2020 and shorter term investors (or traders) bought them for recovery earlier this year and dumped higher quality businesses.

In addition to the above, it is fair to say that war, inflation, China pandemic issues, logistical bottlenecks, recession fears et al have all contributed to losses in 2022.  There are two stock markets in America: the Nasdaq and the New York Stock Exchange.  On the former, half the constituents have more than halved in value this year.  Even the UK government bond market index has fallen by 14%.

In the long term, share prices correlate with companies’ success or failure; in the short term there can be huge disconnects such as now, when fear and panic prevail so I see no reason to change my current investment strategy but will be open to changing my mind if the facts change or investors want to take less risk; even the very best investors have poor years.

Paul Tyndall, Investment Director


The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.

 

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