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  • The Drag Continues…..

    Good afternoon, though I would send out a quick update given that we have seen prolonged issues around the market and the influencing factors around them. With Martin Lewies painting an even bleaker out long on energy prices which look to increase by a further 65% from what they are today by October. As we know history never repeats itself, but it tends to rhyme very well – Meaning we have seen this story unfold before – And my thoughts are that we are very much heading for a recession – Oil prices have fallen off a cliff and so to has the value of copper which many see as combined indicators of an impending recession, the BOE is raising interest rates in a bid to curb spending and therefore cool inflation – Its not happening – Low records of unemployment is meaning higher paid employees (as we see form many union strikes recently) or job hopping for better pay – Meaning more disposable income for the population which equals more spending and fires the inflation issue further.

    What is immediately apparent from the background economic information is that virtually every investment sector has seen significant falls in value over the quarter, six months and year. Over just three months Global Equities have seen a fall of minus 13.56%, North American Technology Equities a fall of minus 22.42% and German Equities a fall of minus 11.51%. Smaller companies are particularly feeling the impact of the Ukraine war. In the UK, for example, the AIM six month figure is minus 27.59%, compared with minus 0.98% for the top UK companies in the FTSE 100. A similar picture can be seen in the US, where the NASDAQ six month result is minus 29.22% compared with the Dow Jones Index (which tracks the 30 largest companies) which returned minus 12.7%. When you consider having money in cash you also have inflation risk -9.1%  at time of writing – While we all know inflation can’t carry on like this we also know that investments also will recover.

    The medium term position over five years is much better, although some sectors are showing negative returns even over this period. It is not until you look at the longer term period of ten years that you have more positive signals. Given the current international situation this is not at all surprising. We are continuing to suffer from high energy prices, global supply issues (particularly, but not exclusively, in respect of food products and food raw materials), other consequences arising from the Ukraine war, concerns about China, global inflation, and other worrying political and economic issues. Global inflation is also much higher than was expected, and consumer confidence has flagged.

    Last quarter we advised that this was likely to be the case, although the large falls in US equity values was not anticipated. It is important, as stated last quarter, not to be panicked into changing our strategy, which is based on the knowledge that different sectors will perform better in different periods. Once sector performing brilliantly one year may well perform very badly the next year. By spreading our investments over multiple different sectors, in proportions gauged according to the attitude of risk appropriate to each portfolio, we are taking full advantage of this well known economic fact. It is true that at the moment most sectors are showing negative returns. This is not a normal situation, and is actually to be expected given the current international situation. But it is also true that this is a short term situation, and our clients need to be investing for the long term, not the short term. The negative positions we have seen so far this year are likely to continue, for how long we do not know, but we also know growth will return. We just have to sit tight and wait for that growth, making suitable adjustments in our holdings as always but not trying to change radically our overall strategy. You could view the investment journey like a passage on an ocean liner. We know the liner will pass through rough seas. Sometimes those rough seas will move the liner in a direction which seems to be completely off course. But we trust the ship’s captain (fund manager), who knows what he or she is doing, and is using the right techniques to ensure we eventually reach our destination safely. We are in those rough seas at the moment, and the returns in the portfolios might suggest we are off course, but we know that as long as we continue to monitor the funds properly and make the appropriate adjustments we will come back on course.

    Here is a graphic I have prepared which shows how different sectors have performed over the ten years up to the end of 2021 as well as over the six months to the end of the current quarter. You should see very clearly from this graphic that it would be very foolish to predict how one sector or a number of sectors will perform and to put all your investment into that one sector or those few sectors. As an example, you might have looked at the performance in 2021 of North America at the very top, Commodities and Natural Resources just below this, and Global Equities just under those two sectors. If you had put all your investment in those three sectors, which were right at the top then, you would find your investment right near the bottom in the first half of 2022. Whilst this year has been quite unusual, as indicated above, the concept would be the same even in the good years. Our strategy of spreading investments appropriately over man sectors works very well over the long term, and in most cases over the medium term too.

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