Join our community of smart investors

Tactics for tightening times

The safety harness has finally been removed. Right on cue, markets showed how they can slip and slide in the face of global economic woes when investors know beyond doubt the Federal Reserve hasn’t got their back. 

Saving stock markets was the goal for years, now it’s to save the economy from the inflation blight that one former US president described as being “as deadly as a hitman”. For central banks, beating inflation, which is accelerating steadily in the US, the UK and the EU, is now a belated priority. 

Having lifted US rates by a half point last week, and confirmed plans for reducing the size of its balance sheet, the Fed then spelt out the risk to markets in its May financial stability report declaring that the combination of adverse surprises in inflation and interest rates, and a decline in economic activity is likely to lead to extreme volatility, and distress. It’s certainly been a turbulent 2022 so far – the Nasdaq shed 13 per cent of its value last month – and we can expect even bigger bites to be taken out of the stock market as the war in Ukraine drags on, interest rates march upwards, shortages worsen and economies stubbornly resist attempts to save them from decline...

The view from the Bank of England, which followed the Fed with a quarter point rise (although a third of the Monetary Policy Committee voted for a half point rise), is equally grim. It has warned the UK is on the brink of a recession and that the rate of unemployment is set to rise with hundreds of thousands of jobs at risk.

Recession and bear markets are real and present dangers. Bearbull tests the chances of either or both being around the corner in his column on page 68. Everyone is trimming growth rates and where expansion is being reported, it seems to be occurring at a slower pace. 

We say it often in this magazine: a balanced diversified portfolio offers investors the best protection in varying market conditions. Not being emotional helps too – the data show time in the market and riding out the shocks, not timing the market, pays off.

Our Analyst column on US and European hydrogen companies is a reminder that 'staying put' allows investors to benefit from long-term thematic strategies – buying exposure to unstoppable powerful trends such as technology and digital transformation, climate change and sustainability, healthcare and infrastructure. Tech's fortunes underlines the point. Despite suffering setbacks as interest rates creep up, and lockdowns end (high conviction Scottish Mortgage has lost more than 45 per cent of its value over the past seven months), no one disputes that tech remains a disruptive force offering growth and durability. It also feeds into many other, if not all, of the big themes of our age, something that is explored in our cover feature on recycling

Infrastructure in particular is one trend that should perform well in the face of rampant inflation. Contracts tend to be linked to consumer price indices, and demand is high and growing for everything from telecoms and transport to energy and construction.

Among supertrends identified by Credit Suisse, one that stands out is Anxious Societies. It reflects the challenges facing society today and the real worries people have over personal, homeland and job securities. Companies to watch in this space, according to Credit Suisse, are providers of solutions to lower the costs of basic needs, that have strong human capital management and that help to improve the safety and security of citizens. 

Staying put doesn’t mean doing nothing. Global chief investment officer Michael Strobaek acknowledges that while supertrends transcend business cycles, “short-term catalysts” can favour some trends above others and investors can adopt a dynamic approach in terms of weightings at any given period in the cycle. 

And Robin Hardy cautions that investors need to be on their toes: “the big winner is not always within the early movers”, and even in new sectors the best returns may come from within well established companies that have been around the block many times before.