Investment Comment
1st July 2022
High summer
As the year reaches midway, investors can only hope that the next 6 months are less damaging to portfolios than the past 6 months. Rising interest rates and bond yields, on the back of inflation, initially impacted equity valuations. In the past 2 weeks fears of a recession, because of the monetary policy tightening, have seen bond yields ease back, but there has been no let-up in the pressure on equities. As a result, US equities that started the year trading on 21.5x PE (price to 12-month forward earnings) are now on 15.5x PE, in line with the average valuation seen since 2000. Other regions have valuations some 13% below the historical norms. Whether or not additional risk should be added depends on the path of the economy and the outlook for earnings.
Earnings remain resilient and are key
Earnings will be key in coming months. In a few weeks, we start the quarterly updates from companies. Over the past year, expectations around earnings have improved for each of 2022’s quarters. Given the angst from commentators about the certainty of an earnings recession, if companies, in aggregate, continue to deliver earnings that match or beat expectations then some of the risk aversion in equity markets should ease.
Infrastructure
Infrastructure has held up relatively well in 2022, potentially due to its short duration type of equity (utilities etc), which means it is less susceptible to the derating that the rest of the equity market has suffered as interest rates and bond yields have risen over the past six months.
Infrastructure has attractive characteristics, which is why we include it in the strategic asset allocation for discretionary portfolios. They generally have relatively steady cash flows and are often regulated in such a way that discourages competition. The high barriers to entry often result in a monopoly for existing owners and operators. In certain instances, revenue increases linked to inflation are embedded in regulatory frameworks. In other cases, owners of infrastructure assets are able to pass inflation on to consumers via price increases, due to the essential nature of the assets and inelastic demand.
Inflation and interest rates
As well as earnings updates in coming weeks, the path of inflation and interest rates will be important. This week’s inflation update from the US continues to show an easing of the inflation rate that is targeted by the Federal Reserve, but remains above the comfort level for the US Central Bank. Consequently, we expect rates to continue to rise through the rest of 2022, but the pace of tightening may ease in the next 6 months.
Seasonal delights
The summer Season is in full flow. Glyndebourne, Henley, and Wimbledon. But even these most traditional events change. Like the welcome introduction of women rowing at Henley in 1993, the ending of the Robinsons drink’s relationship with Wimbledon has been described as cordial.
Gerard Lane Chief Investment Officer
Artorius provides this commentary in good faith and for information purposes only. All expressions of opinion reflect the judgment of Artorius at 1st July 2022 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content.
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