May 2022

The Storm before the Calm

View from the Square

The Storm before the Calm

Events seem to be conspiring to unsettle investor confidence, which leads us to increase emphasis on protecting value as much as seeking to increase it. Inflation is rising and, unless curbed soon, will lead to sharp increases in interest rates. Both factors look set to prompt increased wage demands at a time of full employment. This combination is already proving toxic in technology markets with prices falling and funds hard to secure. Russia is suddenly advancing in Ukraine and George Soros warns in the Daily Telegraph that Ukraine could be the start of a Third World War. The Financial Times adds to the cheer by indicating that technology stocks in the US are now in a traditional bear market.

We are now basing strategy on a tough couple of years where an underlying priority will be securing solid income to tide investors over any period of market volatility. Long term interest rates seem likely to increase, and the usual effect of authorities increasing short term interest rates in response is to tip economies into recession, to bring inflation under control. This places a premium on stocks that are liquid, have strong cashflow, which in turn permits rising dividends. In bond and credit markets the safest places are in short duration or early maturity dates; cash becomes more attractive as well.

There is talk of a possible pause in the US of increasing interest rates as sharply as recently indicated, in the early autumn. However, continuing pressure on energy and cereal crops suggest this hope might be short lived, and we face even harsher interest rate increases slightly later. We hope to use this period to storm proof your portfolio as much as possible and leave it in a strong position when these crises abate.

The UK is usually the poor relation of global markets with the FTSE 100 not much higher than in 2000 when markets peaked. Large capitalisation stocks have often been overshadowed by faster growing new and smaller companies with investors willing to wait until they developed and matured. Now companies suffer sharp valuation declines and sometimes worse as additional funding comes at much lower levels, or not at all.

Much is changing on a global basis, and Soros now criticises the previously well-regarded Angela Merkel for leaving Germany hostage to Russian gas, and to China for their major export market. In the short term we will have to be patient on the ESG (Environmental, Social & Governance) front as wind power cannot propel cargo ships and solar panels cannot put planes in the sky. The understandable pressure to protect the planet has come at significant cost to security. As income generating companies in, say, the energy sector have been discarded (so that it only represented 2% of the main index at the low point) opportunities have been created for investment managers prepared to use the full palette of investment choice.

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. 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.



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