A happy, healthy and fulfilling new year to you. Unlike those put off by the Omicron variant, this week saw me return to my regular exercise regime at the local gym. After exiting just before 8am, I took the above picture which captures both a beautiful sunrise and the challenges posed to our planet by industry.
2022 will be a key year for climate change as part of the ESG agenda, although I would remind investors, providers and regulators alike that ESG is not just about the ‘E’ for Environment but also about the ‘S’ for Social and ‘G’ Governance. Responsible is the word retail investors most relate to, rather than ‘transitioning or aligned to sustainability’.
One of the financial market headlines this week was US inflation hitting a 40 year high of 7%. Energy prices, plus supply shortages impacting goods with robust consumer demand, have played their part as can be seen from the following graph sourced from The Daily Shot. Broad-based labour shortages have brought about wage increases which have resulted in higher prices.
Surprisingly, bond yields having previously risen sharply in January, were barely moved – possibly as this inflation number was largely anticipated and in the price. Still, a ten-year US Treasury yield of 1.75% hardly compensates investors for inflation risk of multiple dimensions. The US stock market largely shrugged off the news and was broadly better on the day.
Looking beyond the next couple of months, a growing consensus believes that the pandemic will be less of an issue as Omicron’s speed of transmission creates a faster route to a form of herd immunity. That should also result in fewer sickness absences. Energy prices should have subsided entering spring. The inventory build that has been a result of scrambling to meet consumer demand, already looks to be past its peak. Inflation is expected to moderate as a consequence. Of course, both the US Federal Reserve and the Bank of England have been baring their teeth in the face of rising inflation. As a result, four interest rate increases are already priced into the US market and similarly in the UK.
GAAP vs GARP vs Value
Bond yields rising sharply have spooked growth equities, particularly those US companies dependent on future earnings and profitability. Their valuations have understandably come under the spotlight and those companies that had spectacular returns in 2021 have given a chunk of it back – quickly. It doesn’t mean they are bad businesses, just that they became over-extended in price and valuation terms. Thus, growth and at any price (GAAP) has given way to a preference for proven growth from solid businesses whose earnings are more reliable, regularly beating forecasts. You will have heard much about a ‘growth’ into ‘value’ rotation, but we view that more of a rotation into growth at a reasonable price (GARP). So called value stocks are often those exposed to rises in interest rates and increased labour costs, so while economic recoveries may help them, margins are often squeezed by rising costs offsetting better sales volumes as has been witnessed in some UK retailer results this week.
Like any investor, we prefer to buy cheap assets and avoid expensive ones. Japan is frequently avoided or unloved by foreign investors. The theme within Japan that makes it of interest is improving corporate governance, with a greater focus on shareholder returns. Japan is the home of many world-leading businesses, especially in robotics. It also has market leaders in other fields. One example is Recruit, better known as Indeed in the UK. As we mentioned earlier, earnings are in sharper focus for markets and the following chart sourced from Absolute Strategy Research, might surprise readers.
Rather than become involved in the oscillations of markets at the start of 2022, we have continued to allow cash from inflows to build up as a buffer prior to putting some of it to work when the dust settles – we are not traders, but we are stewards of you and your clients’ savings. However, we have added to Japan exposure in the Growth Fund while at same time, continued to trim some of the remaining GAAP in favour of GARP.
Bailey Fund Services
This week, our sister company, T. Bailey Fund Services Ltd (TBFS) has been sold. TBFS is an Authorised Corporate Director (ACD) and fund administrator providing services to a large number of funds, not only those of T. Bailey Asset Management (TBAM). TBFS operates independently of TBAM and their sale has no impact on us and does not alter the way we conduct our business with our clients.
We remain most appreciative of your ongoing support and wish you well in 2022.