December 2021

Fourth Quarter 2021

View from the Square

The benign market equity investors enjoyed over the summer months, and for much of the last year, came to an abrupt halt in September, as volatility returned to markets. There were all manner of events for bears to get their teeth into – from the impending default of one of China’s biggest property developers (Evergrande), to a brewing energy crisis stoking inflationary fears. Filling up your car will cost you nearly £1.50 a litre, and a beer at your destination will set you back a great deal more than it did before the pandemic. It is abundantly clear that inflationary pressures are re-emerging and less transitory than central banks have anticipated. Investors should prepare themselves for the possibility of a stagflation winter – characterised by slowing economic growth and rising inflation.

For investors in a multi-asset portfolio, this will likely mean having a below benchmark weighting in bonds. Inflation is a bond investor’s nemesis and especially so in the current environment – starting from a very low base (in yields). But outside conventional bonds, investors can look to inflationlinked bonds, which seek to provide a degree of inflation protection; or floating-rate notes, which see coupons rise with interest rates. Within equities, companies with low levels of debt and strong pricing power are likely to fare well in such an environment. Value stocks (such as banks, industrials and resources) could also have a renaissance after a summer lull and typically fare well when inflationary forces are present. And finally, some exposure to real assets (commodities, gold, infrastructure and property) appears prudent. Whilst this latest bout of inflationary pressure will be a concern for central banks, the transitory narrative (inflation being elevated for a short period of time) is still the base case rather than inflation spiralling out of control. Over the medium term the market believes inflation will run at 2-4% and this has historically been a good environment for stocks.

We are in little doubt though, that the autumn volatility in markets has some way to run through the rest of 2021 and we will likely continue to see sentiment ebb and flow on inflationary dynamics, as well as the outlook for economic growth. Worries over the health of the Chinese economy is real and the situation with property developer Evergrande has some of the hallmarks of the beginning of the financial crisis, which Chinese authorities will wish to avoid at all costs. The opportunities for active management (both in asset allocation and security selection) appears more abundant than over much of the last decade (where assets rose in unison), as investors adapt to a new post pandemic regime and adjust portfolios accordingly.

Opinions constitute our judgment as of this date and are subject to change without warning. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it may go down as well as up. Interested parties should seek advice from their Investment Adviser. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority. Registered in Scotland SC231678. Registered Office Edinburgh Quay, 133 Fountainbridge, Edinburgh EH3 9BA.


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