December 2021 Mid Monthly Update


It’s been a challenging couple of years for many and we hope that we have delivered for you and your clients.

Thank You  

Usually, we put a thank you to you at the end of the mid-monthly updates but as this is the last mid-monthly update of 2021, you deserve to be at the beginning.

It’s been a challenging couple of years for many, not just for markets but also for mental health awareness too.  We hope we have delivered for you and your clients over the course of this year and welcome any comments or questions you may have.  Wishing you the best Christmas possible and a happy, healthy and prosperous 2022.

Inflation Duration  

The eye-catching data release of last week was the US inflation (as measured by the Consumer Price Index) report for November at 6.8% from a year ago with core inflation (ex food and energy) at 4.9%.  With UK inflation at 5.1% in November from a year earlier, the question for investors is, how long will inflation remain at these levels.  Read the headlines and it’s all about the next few months.

Bond markets would suggest inflation isn’t a long-term problem as longer-term government bond yields remain below both the current inflation rate and US and UK target inflation of 2% per annum.  At 1.40% and 0.70% for US and UK ten-year government bond yields respectively, bonds continue to look like a good market for borrowers not savers. Astoundingly, fifty-year UK government debt (gilts) yields just 0.60%. Six months ago, the yield was almost twice that.  So, longer-dated duration yields would appear to be somewhat sanguine about the long-term persistence of inflation.

Energy prices might be expected to abate in 2022 but employment will be key as labour markets remain tight resulting in rising wages.  There is every chance that higher wages and labour scarcity will persist.  Signs of collective bargaining have been seen already so the company winners are likely to be those businesses we favour – those with solid business models, decent margins and free cashflow generation as opposed to those highly reliant on high volumes, cheap labour and thin margins.

The Omicron variant of Covid-19 will amplify financial market volatility in thinner markets approaching year end. While it’s early days, the optimistic view is that the natural course of viruses is to mutate to keep themselves alive thereby becoming more transmissible but less virulent.  Vaccine responses have been impressive in regard to Covid-19 with a tablet form currently under development and according to Pfizer; 90% effective.

Financial markets’ current fright over Omicron may be a short-term reaction to more uncertainty at a time when investors are waiting to evaluate any official changes in interest rates.  Indeed, Omicron may provide another excuse for the Bank of England to do nothing in the near term but a reduction in extremely accommodative US and UK monetary policy is highly likely but largely priced in for 2022.  Not a time for binary decisions though, except for continuing to avoid most debt instruments.

Your Money 

Inflows have been allowed to bolster cash positions to 10% in the Growth Fund and 11% in Dynamic providing a defensive cushion at this time.

Growth’s Japanese equity exposure has been added to as Japan offers both an excellent diversifier to a global equity portfolio and through its fiscal stimulus and corporate governance reform, a relatively positive outlook for 2022.  Through extensive research, we uncovered a beneath-the-radar Japanese equity manager with significant on-the-ground experience in Japan but now resident in the south of England. This purchase was funded by the final sale of a Digitalisation ETF purchased in March 2020 which has been particularly rewarding for both portfolios.

The same sale in Dynamic was used to acquire a position in one of the few appropriately managed ‘sustainable’ funds in UK equities. Both Growth and Dynamic retain extensive exposure to the digital economy theme.

As in previous years, we have donated the money we would have spent on Christmas cards and associated seasonal material, to charity.  This year we have donated that money to The Trussell Trust, supporting a network of 1200 foodbanks in the UK and Base 51, supporting 11 to 25 year-olds.

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