An update from our investment partners, J M Finn.
We wanted to provide you with an update on market developments in light of the invasion of Ukraine by Russian forces this week. It is of course a very dark moment in history and our thoughts are with the people of Ukraine. We hope for a swift de-escalation of the conflict, but at this stage, it is very difficult to forecast what the endgame will be. It is clear that President Putin has an agenda for Ukraine, which has been years in the making, and so we will not be surprised if a full occupation of most of the country is carried out. How long the occupation lasts will be dependent, we believe, on how long it will take Russia to establish a pro-Russian government and whether the Ukrainian people rebel against this forced measure. There is no doubt that geopolitical risk will remain elevated now for some time as the West tries to put together a coordinated response to ensure the conflict is contained as far as possible.
Even before this week’s events it has been a very uncomfortable start to 2022 for investors as rising inflation and forecast interest rates hikes have provided a headwind for equities, particularly the more growth-orientated companies where we have the majority of our exposure on portfolios. This week’s events will add to the inflationary pressures as commodity prices will remain high and food prices will also be impacted due to both countries being large exporters of wheat and corn. We still forecast that overall inflation will decline as the year progresses. However, this may fall back to around the 4% level rather than our previous estimate of 3-4%.
Central banks will now have to consider the impact on growth estimates given the disruption of sanctions and the inflationary impact on consumers’ behaviour limiting their disposable income. It is worth saying that the global economy is growing at this stage and the US economy still looks particularly strong so immediate concerns over an impending global recession are not founded at this time. If central banks limit their interest rate rises and inflation moderates through this year, we can see a scenario that allows companies to navigate through the challenging conditions without too much impact on their profit margins.
This is particularly true of the vast majority of the companies we own which we term as ‘quality compounders’ that trade well through varying economic conditions. Earnings for these types of business remain fairly consistent as operating margins are protected from the effects of inflation and revenues continue to grow as their products and services remain in demand through the cycle. These companies have given up some ground this year as the effects of the increase of bond yields have depressed their market valuation – however, as long term investors we are less concerned. A good business does not become a bad business overnight because the 10-year bond yield rises from 1% to 2% or due to a shocking invasion of another country by an aggressor.
J M Finn is evaluating the impact of the events of the year so far and ensuring that portfolios are positioned appropriately for the more uncertain economic and geopolitical environment we are facing. They added some ballast last year, but they will continue to adjust positioning on portfolios appropriately, in particular, looking at those businesses that may continue to struggle in a higher inflationary period. In times of market turmoil, whilst acknowledging the significant discomfort of seeing portfolio values pull back, a measured approach does ensure sensible decisions are made and they will continue to focus on the longer-term prospects for their positions.
If you wish to discuss anything specific please do not hesitate in contacting us at firstname.lastname@example.org.