10 March 2022
The distressing news from Ukraine shows no signs of abating. In response to unpredictable and worrying geo-political developments, investment markets have continued to be volatile with widespread declines in portfolio values. As at 8 March 2022, for example, the US equity market had fallen by -6.9% in the course of a month; the UK’s FTSE 100 was down by -7.7% and the Euro Stoxx 50 index had lost -14.4%.[1]
A key concern is the war’s impact on commodity markets. Russia and Ukraine are important exporters of both ‘hard’ commodities – notably oil and gas, but also industrial metals like aluminium, nickel, copper and palladium – and ‘soft’ commodities such as wheat and fertiliser. The combined effect of sanctions against Russia and the threat of physical disruption to supplies have caused prices to rise sharply, for example with oil hitting levels not seen since 2008 and European natural gas trading at 16x its price of a year ago.[2]
The prospect for recovery
The resulting increase in the cost of living is likely to dent consumer demand, most substantially in Europe but significantly in the UK and elsewhere; this will depress the rate at which economies can continue their recovery from Covid damage and could push some back into recession.
In the corporate sector, whilst only a minority of companies will find their ability to do business directly hampered by the war, many will be challenged by a slowdown in demand and by rising input costs. This has led investors to lower expectations of company profitability over the medium term.
The current bout of volatility has served as a reminder that the attractive returns which real assets such as equities can deliver do not come at an even pace. Over the long term a portfolio of investments selected for their ability to generate predictable and growing cash-based profits can deliver both a reliable income stream and capital growth. However, equity prices fluctuate on a regular basis, often in ways which may not reflect the fundamental characteristics of individual businesses.
Outlook for CCLA funds
At CCLA we aim to deliver strong risk-adjusted returns for our investors over the long term. We therefore remain focused on those fundamental asset characteristics, always with a view to adding value and controlling portfolio risk. For example we reduced our exposure to market risk late in 2021, reducing our holdings in many companies and exiting a few where we believed that market valuations had overshot the level at which we were confident that a particular stock could continue to add value. We have remained cautious so far this year, reinvesting cash only in a few cases where we have found valuations to have reached a more attractive level.
Among the characteristics that we look for in our preferred stocks are the ability to prosper over the long term independently of wider economic trends, and we avoid the most cyclical stocks. The sectors currently most heavily represented in our portfolios are information technology, healthcare and non-bank financials. In recent weeks these have suffered from the wider market malaise, in many cases more so than some stocks in the ‘value’ or more cyclical categories; but we remain confident that our well diversified multi-asset funds will continue to deliver on their return objectives while remaining within a degree of risk significantly below that of the equity market.