Page 14 - DIY Investor Magazine | Issue 33
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In their first catch up of 2022, Joe Lynam and Matthew Tillett look at the issues that markets have faced in the early part of 2022 and how some of those factors may play out over the coming months.
     Joe Lynam: Hello and welcome to the ninth and latest installment of Connected Investor, the podcast from The Brunner Investment Trust.
I am Joe Lynam, the BBC presenter and News talk business editor, and in this podcast we’re going to talk about some of the geopolitical and economic factors that investors have been digesting so far this year and how it may affect, the markets.
As ever I’m joined by Matthew Tillett, the Lead Portfolio Manager of the Brunner Investment Trust. Matthew, it’s been an extremely volatile start to the year - what have the markets had to digest since we last spoke?
Matthew Tillett: So the big change that’s happened is regarding interest rate expectations. The markets are now expecting a number of interest rate hikes this year, and that’s really changed actually in the last month or two.
The reason for that is the realisation that the inflation that we’re seeing in the economy is not really going to be transitory, at least not in the way that the central bankers in Europe, in the U.S., had been saying and hoping it would be last year.
What we’re seeing is a combination of supply side issues restricting the supply of certain goods, but actually the demand side is also really quite strong and has come back quite powerfully, as a result of all the stimulus that was put in place during Covid. And now we’re seeing economies reopen as well as the Covid restrictions coming off, which is likely to put more pressure on the demand side.
Market participants are now expecting interest rates to rise quite a bit this year, and the impact that’s had has caused a really quite savage rotation within the stock market. What
we’ve seen is the so-called growth stocks – which are basically companies that are growing rapidly, they have most, or a lot of their value quite far into the future, typically because they’re on high valuations compared to near term earnings – those stocks have come down quite heavily, really significantly in some cases.
Because interest rates are moving up, investors are using a higher discount rate to discount those cash flows.
And the flip side is also true in that the so-called value stocks – the companies that trade on low valuations of current earnings or cash flows – have generally done better, because again, the mathematic works in their favour.
I should say that we in the Trust largely rather reject that
whole dichotomy and we find opportunities across the whole spectrum of growth and value stocks, but the market does tend to be very, very sensitive to these things, and so you get these really big rotations.
And we’ve had quite a few actually over the last few years, but particularly since Covid, and this one has been particularly severe in terms of the intra moves within the market. I think January was the second-best month on record for value versus growth, just to give you an idea of how extreme it’s been.
So that was what was going on really in the first few weeks of the year, and then obviously now more recently we’ve had the terrible conflict started up in Ukraine to deal with, which has thrown up a whole load more issues.
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