Five things keeping investors awake at night

Why is it that problems always seem worse at night? As soon as the lights go out, and there are no distractions, my mind will start spinning. I’ll sometimes lay awake until the small hours, longing for sleep, but unable to stop replaying conversations or events, or trying to think of possible solutions. But often, when I awake (unrefreshed) the following morning, those issues are somehow more surmountable.

And there is plenty to worry about in the world today. Economic, health and geopolitical concerns seem to be everywhere we look right now. Some are beyond our control, other risks we can mitigate.

Here are five things that are keeping investors awake at night and what the experts predict is likely to happen.

Rising inflation

Inflation is high. In the US it came in at 8.3% this week, while in the UK it is currently 7%.
“Global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine,” the Bank of England’s Monetary Policy Summary for May 2022 stated. “This has led to a material deterioration in the outlook for world and UK growth.”

Inflation is also set to go higher. “CPI inflation is expected to rise further over the remainder of the year, to just over 9% in the second quarter of 2022 and averaging slightly over 10% at its peak in the final quarter of 2022,” it added.

In a recent update, Ariel Bezalel and Harry Richards, who manage the Jupiter Strategic Bond fund, highlighted the issues. “The Russia-Ukraine conflict has added another layer of uncertainty, pushing up oil, natural gas and commodity prices, including food,” they wrote. “Similarly, these price spikes act as a tax on the consumer and, ultimately, have a deleterious effect on demand.”

Inflation has risen rapidly in areas households struggle to avoid, such as energy, food and fuel. This means many people are already having to alter their spending decisions to cut back on discretionary items.

Funds that offer some inflation linkage in their underlying holdings include BMO European Real Estate Securities, TIME:Commercial Long Income and First Sentier Global Listed Infrastructure.

Interest rate hikes

We have had years of rock bottom interest rates – but that’s changing. The Bank of England decided in early May to raise interest rates by 0.25% to a 13 year high of 1%. All nine members of the Bank’s Monetary Policy Committee considered policy tightening to be appropriate given the labour market’s strength and the domestic inflationary pressures.

However, some wanted a more severe hike, which could mean further increases this year, according to Schroders economist George Brown. “Three policymakers went one step further and called for a more aggressive 0.50% increase to 1.25% in order to stamp out the risk of second round effects,” he said.

So, what do interest hikes mean? Well, in theory they are great news for savers, as long as the banks and building societies pass on the increases. However, they are bad news for homeowners on variable rate mortgages who are likely to face an increase in the amount to be paid each month.

While interest rates are rising, UK equity income funds are still producing considerably higher levels of income than savings accounts. Threadneedle UK Equity Income has an historic yield of 3.2%* for, example, while Janus Henderson UK Responsible Income is yielding 4%.

Richard Sennitt, manager of Schroder Oriental Income, also discussed how Asia dividends are continuing to grow in this recent podcast:

Supply chain problems

Global supply chains are causing widespread problems – and economists don’t expect the situation to improve anytime soon. This is due to several factors, including Russia’s invasion of Ukraine and the recent lockdowns in China as the country battles a Covid-19 outbreak.

David Chao, global market strategist, Asia Pacific, at Invesco, believes the Chinese economy could re-accelerate in the back half of 2022. However, he acknowledged near-term issues.
“The lockdown in Shanghai is likely to also affect transportation and logistics to and from one of the world’s busiest ports, which could pressure global supply chains,” he said.

The Elite Rated Invesco China Equity fund, whose lead manager is Mike Shiao, is one way to get exposure to the country. Other options include FSSA All China and Allianz China A Shares.

More broadly, there is also the ongoing problem of the semiconductor shortage. It’s an issue that was raised by the JP Morgan Research team at the back end of last year. In fact, the report highlighted how they are needed for everything in cars from the entertainment systems to the power steering. “For the auto industry, the supply crunch and shortage of chips has forced car manufacturers to cut production and delivery targets and has led to a number of profit warnings,” it added.

Profit warnings

Businesses are having a tough time right now. In fact, 72 UK-listed companies issued profit warnings during the first quarter of 2022 – 44% more than in the same period last year. That’s according to data compiled by EY Parthenon, which highlighted five main reasons given by management teams for the warnings.

Increasing costs and overheads was top of the list with 43%, followed by 38% that highlighted sales falling short of forecasts, and the 29% citing coronavirus. Supply chain issues were flagged up by 22%, while the remaining 19% blamed the warning on delayed or discontinued contracts.

According to Alan Hudson, EY-Parthenon partner and UK&I turnaround and restructuring strategy leader, 2022 was always going to be difficult for companies due to inflationary pressures. “We are now looking at a year with ongoing Covid-19 disruption alongside higher inflation, greater uncertainty, and faster monetary tightening than we expected just a few months ago,” he said.

However, there are clearly still attractive opportunities available, according to the most recent monthly update from the Liontrust Special Situations team. The report highlighted Big Technologies, which provides software solutions for the electronic monitoring of criminal offenders. “It generated 27% revenue growth in 2021 and it is targeting a similar level of growth for 2022,” it stated.

And of course, there are some funds that can make money when share prices fall – something that tends to happen after profit warnings. Examples here would include Threadneedle Global Extended Alpha and Sanlam Enterprise.

Stephanie Bothwell, co-manager of the BlackRock European Absolute Alpha fund, explained how this works in a podcast interview.

Investment fund returns under pressure

Investment funds haven’t performed very well during the first three months of the year. In fact, only three Investment Association sectors out of more than 50 were in positive territory, as managers struggled with the volatile economic backdrop.

Worried investors took out £2.5 billion in February and £3.4 billion in March, according to data published by the Investment Association.

Fixed income funds endured outflows of £3.3 billion, as persistently high inflation and the tightening of monetary policy threatened to undermine investors’ returns. Chris Cummings, chief executive of the Investment Association, said: “Investors remained cautious in March in light of monetary tightening and Russia’s invasion of Ukraine.”

Rather than exiting their investments completely, investors may be better served putting their money into a multi-asset fund. This increases diversification and means the fund manager can invest in the asset classes that offer the best opportunities at any moment in time.

Examples of this type of fund are Jupiter Merlin Income Portfolio, Brooks Macdonald Defensive Capital and SVS Church House Tenax Absolute Return Strategies.