The Banking Mayhem Continues
With Credit Suisse rescued, attentions switched to Deutsche Bank whose shares fell last week. Its CDS spiked to over 2.20% amid stability worries.
It was another pleasing quarter for equity investors, with the global stock market rising 7.4% in the 3 months to the end of June. Nearly all the main sectors and major markets delivered positive gains. Many put this down to successful vaccination rollouts across much of the world, global industrial production getting back on its feet and the re-opening of society.
While lockdowns and their economic impact might feel like they’ve gone on for a long-time, all of this is likely to appear as a wriggle on a chart when an investor looks back over a lifetime of investing. That’s why we don’t pay too much attention to short-term events (and by short-term we mean less than five years) and remain focused on the long term. It’s what happens over decades, not years, months or weeks, that’s going to have the biggest impact on your wealth.
We know many investors still want to know what’s been going on with the markets though. So, while we won’t be swinging our clients’ portfolios around in response to short-term events, here’s our round-up of the past quarter.
During the second quarter of this year the market favoured higher-quality companies, which tend to be those with steady earnings, healthy profit margins and low levels of debt. This might seem like a no-brainer – why would you want to own inferior quality companies? That’s the thinking shared by many fund managers and arguably the world’s greatest investor, Warren Buffett.
Only last quarter though ‘value’ companies, which aren’t necessarily bad businesses but tend to be lower on the quality spectrum, were pick of the bunch. If anything, this just goes to show there’s no such thing as a sure thing in investing, which is why we like to blend different styles of equities in our portfolios – quality, value, large, small and so on.
The best performing sector and market over the past 10 years – technology and the US – were back on top, after falling down the pecking order at the beginning of the year. They rose 10.5% and 8.8% respectively. Few would bet against either of these and while we certainly wouldn’t either, nor do we want to stake a big bet on tech or the US, or any other area for that matter. That’s why our portfolios’ exposure to each major sector and region is broadly the same as the global stock market.
Despite tech and the US (as well as cryptocurrency, but we’ll come on to that later) normally grabbing the headlines, they’re not the best performing areas over the past year. That prize goes to smaller companies, or ‘small caps’, which usually fly under most investors’ radar but have leapt 46% in 12 months.
Although they’re more volatile than their bigger brothers, smaller companies also have more room to grow. There are many thousands for fund managers to scour, and among them you’ll find some of the most innovative and game-changing companies around. With so much potential, you’ll find small caps in most of our new model portfolios.
It was a better quarter for bonds. The global bond market climbed 1.3%, which may seem modest but is a good deal higher than its 10-year-average quarterly performance. Bond returns are inversely linked to yields. If yields fall it’s generally good news for bond investors and that’s what happened recently, with 10-year US Treasury (government bond) yields dropping 30 basis points to 1.45%.
As consumer and corporate demand around the world picks up there’s talk of inflation rearing its ugly head. While we’re seeing some already, it’s coming off a low base, and many central banks expect inflation rises to be temporary. Whether inflation is stoked higher or subsides, inflation-linked bonds have benefitted in the recent quarter and risen more than the broader bond index.
Another beneficiary of inflation concerns was gold, which tends to perform well if there are inflation shocks. It rose 4.3% over the quarter, despite a tumble in mid-June. Both the recent gains for gold and bonds, however, were not enough to offset the losses they sustained at the beginning of the year. Is that a cause for concern? For us it isn’t.
Even investments considered relatively ‘safe’ will go through periods where they fall. Nothing goes up (or down) in a straight line, and we view the recent returns of bonds and gold as normal market movements that are part-and-parcel of investing. Although any losses are disappointing, we still view bonds as one of the best ways to reduce volatility in a portfolio, and expect gold to provide protection when markets become turbulent, such as during the dot com bubble and the 2008 financial crisis.
One of the best performing alternative assets in the second quarter was commodities. Commodities are a broad mix, made up of precious metals like gold and silver, industrial metals such as copper and aluminium, energy – mainly oil and gas – and agricultural products including grains and livestock. They delivered double-digit gains over the past three months, gaining 11.7% and adding to their strong recent growth, which has seen a return of 43.5% over the past 12 months.
Look back further though and commodities delivered nothing short of dreadful returns, losing more than 37% over the last 10 years. While this means some wouldn’t touch commodities with a barge pole, others view this as an attractive point to invest. Commodities can move in ‘supercycles’ – long periods of rising prices that can last for a decade or more – and some predict we’re about to start another.
There is a view that with President Biden’s $1.2trn infrastructure package and the global movement towards sustainable energy sources and battery-powered vehicles – all of which are heavy consumers of commodities – they could be headed a for a purple patch. While we don’t currently invest in commodities, we appreciate the diversification and inflation protection they can offer, and so they could feature in our portfolios in the future.
During our last quarterly update, we looked back to 2018 as a reminder of how volatile cryptocurrencies can be – well, we don’t need to look back so far now. Bitcoin began the quarter at $58,926.56 and by the end of June was changing hands for $35,040.84 – a loss of over 40% in three months.
That’s not intended as an “I told you so” – Bitcoin could potentially recover just as it could drop even further. It’s important investors remember, however, that what goes up, can also come down, and often with a very hard bump. So, if you are going to invest in anything highly volatile, make sure the rest of your portfolio is well-diversified so you can take the rough with the smooth.
All data in USD terms to 30 June 2021
Written By Jonathon Curtis, Head of Investment Research
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