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Diary of a Fund Manager - And Away We Go

Date: 10 January 2022

In this week’s Diary a summary of the assumptions that are currently embedded in markets and some thoughts about the uncertainties that may come to dominate the years ahead.

Welcome 2022. After the Christmas lull, markets may be on the move, but without much conviction. Last week just about everything went down other than oil. Beneath the surface investors in Hungarian and Turkish equities made money, but those in Denmark, closely followed by US technology shares, ended well into negative territory. Those searching for guidance from these moves are struggling. The first week of the year may be a popular time for predictions, but not for making longer term investment decisions.

Looking at where I signed off the last Diary on 13th December reinforces the view that not much has changed in the last few weeks. Omicron and energy prices remain a concern. Inflation is reducing household income in real terms and Russia remains on manoeuvres. The prospect of higher interest rates and less central bank support has exposed the more speculative parts of the financial world to the harsh light of reality. The technology sector sell off is just one example, but to be clear, it is the ‘blue sky’ peripherals that are going down, as they have been for many months, rather than the top five which have come to dominate the global economy in recent years. As an aside, looking at returns in December my best performing holdings were Airbus and Marriott, with Amazon and the other FAANGs amongst the worst. The question for investors is does it make sense to sell long term winners to buy into the short term recovery bounce? Answers differ depending on perspective and optimism about a return to the good old pre-covid days.

Setting aside the short term noise the ‘big fat’ assumptions of this year are that;

  • The global economy will continue to grow, not quite as fast as last year which was the best for 40 years, but still above average.
  • The US Federal Reserve will increase interest rates three times during the year, but only by fractions. If economic growth falters, it will back away from being tough.
  • Geopolitical hotspots will continue to be more bluff than action.
  • Covid will remain a problem, but not worse.

On this basis, the trends that drove markets higher last year have a good chance of continuing into this year, with adaptability and resilience at a premium.

Why the lack of conviction that I mentioned earlier? It is hard to be certain, but as a starter I have two suggestions;

  • It could be related to the growing realisation that rationality, the opiate of the thinking person, is no longer dominant. The growth of knowledge has not made us more reasonable. Those striving to understand US politics or the anti-vaxxers should take note.
  • Another uncertainty is the transition away from fossil fuels which over the last 250-300 years have been at the heart of economic growth. Can this be done without causing trouble? Resource wars whether hot or cold are unlikely to moderate.
Financial markets will cope as they always have.

Those who construct pseudo realities that aim to shape the way we think and act will eventually fail to withstand the test of time. Free markets may have their critics, but do eventually expose fools, liars, hypocrites and other peddlers of fake news.

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