May Investment Summary
The month of May provided a brief respite from the relentless bearish sentiment and price action of 2022. In sterling terms, European, Japanese and Chinese equity markets were positive for the month. The S&P 500 was basically flat while the tech heavy NASDAQ was down just over 2% for the month. There was a small whiff of optimism that inflation was peaking in the US, as it had slid down to a mere 8.3% in April from the 8.5% recorded in March. The markets were giddy enough to suggest that the US Federal Reserve might pause hiking rates in September. US rates reflected this as the ten-year US treasury yield drifted down to 2.75% after touching 3.10% in early May. This was despite oil prices touching $125 a barrel during the month. There was almost the perverse hope that an economic slowdown would show up and stop the Fed from hiking more. How a slowdown would somehow be good for equities was never really discussed.
This optimism has been shattered by the data in early June. Headline CPI jumped to 8.6% in the US, 9% in the UK and 8.1% in the Eurozone. The ECB has shifted to a more hawkish stance promising to hike rates at their next two meetings and possibly more and stating they would end asset purchases on July 1st - can you believe with inflation over 8% they were still buying securities? European bond yields leapt higher with the ten-year German bund climbing above 1.5%. You may recall they started the year with a negative yield! Perhaps more concerning was the rise in peripheral European bond yields. Ten-year
Italian yields rose to over 3.6%. Ten-year Italian government bonds had begun the year yielding around 1.25%. The ECB promised they would not allow a fragmentation of monetary policy to occur in Europe. This is code for at some point they will step in and buy peripheral bonds to prevent a panic, but they gave no specifics on exactly how and when they would do that.
Naturally equity markets do not like this combination of higher inflation, higher yields and tougher central bank rhetoric. In the US, the Federal Open Market Committee (FOMC) meets on June 14-15 and rumours of a 75-basis point hike are circulating. This seems unlikely to us as the Federal Reserve doesn’t like to surprise the markets. A steady dose of 50 basis point hikes over the next several meetings is more likely. There are five more FOMC meetings this year (counting this one in June). It is very possible that they hike 50 bps at each meeting putting the Fed funds rate at 3.25-3.50% by December. This is much faster and higher than the markets have been pricing and would negatively impact both bonds and equities.
Unfortunately, inflation has gotten out of hand and is hurting the majority of households (voters) to such a degree that governments are pushing their central banks to act. Acting, means hiking rates until activity slows down. This can be unpleasant.
We aren’t any smarter than the Federal Reserve and we can’t tell you when inflation will peak, nor how fast it will decline to a level that makes the central banks stop raising rates. Nor can we or the central banks for that matter tell you how high interest rates need to go to bring inflation down. What we can say is that the investment environment is undergoing a huge change. After nearly a decade of zero (or negative interest rates) and massive asset purchases by central banks, monetary policy is going in reverse. Interest rates are heading up and asset purchases are stopping and, in some cases, reversing. Assets that benefitted during this environment will be hurt and many already have been. Just look at the carnage in the disruptive tech equity space.
We are playing defence, overweighting the one major market that has been positive, the UK. Its sizeable exposure to energy and commodities has helped it to outperform developed market peers and we expect this to continue. We have also reduced exposure in the more speculative tech space and have considerably reduced the duration of our fixed income holdings. Bear markets do throw out the good with the bad and we will patiently look to add quality assets at distressed prices.
Jeffrey Brummette
Disclaimer
This document was produced by Oakbridge for information purposes only and for the sole use of the recipient. Any information provided by a client ("Client Information") and used to produce this document will have been checked by Oakbridge for plausibility only and the client notified accordingly of any obvious anomalies. However, Oakbridge has not checked the Client Information in detail for completeness and accuracy and accepts no responsibility whatsoever in respect of the Client Information. The Client makes all investment decisions independently. Past performance, simulations and forecasts are not necessarily a reliable indication of future performance and the value of investments may fall as well as rise. The information contained in this document is only valid at the time this document is produced. A change in the economic environment, possible changes in the law and other events may cause future performance to deviate from that expressed or implied in this document. The information and analyses contained in this document have been gathered from sources that are generally considered to be reliable. However, Oakbridge makes no representation as to their accuracy or completeness in relation to the investment products described and does not accept liability for any direct or consequential losses arising from reliance on the information contained in this document. An Oakbridge Group company may, to the extent permitted by law, participate or invest in other financing transactions with the issuer of the investment products referred to herein, perform services or solicit business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof. Alternative investments, derivatives or structured products are complex instruments that typically involve a high degree of risk, and are intended for sale only to investors who are capable of understanding and assuming the risks involved. Investments in emerging markets are speculative and significantly more volatile than investments in traditional markets. Some of the main risks are of a political, economic, currency or market-related nature. Furthermore, investments in foreign currencies are subject to exchange rate fluctuations. Investments in the investment products described in this document should be made only after carefully studying and reviewing the product documentation. The opportunities and risks associated with each investment product can be found in the relevant underlying securities prospectus and any other supplementary documents. All documents will be made available at any time upon request. Oakbridge does not provide tax or legal advice and, before entering into any transaction, investors should independently consider the financial risks as well as the legal, tax, credit and accounting consequences of that transaction. The attached material is not the result of our/a financial analysis. Neither this document nor any copy may be further distributed to any party. In particular, it may not be sent, taken into or distributed in the United States or given to any US person. This restriction applies equally to other jurisdictions, unless such actions are performed in compliance with the applicable laws of such jurisdiction. This communication is confidential and intended solely for the person to whom it is delivered. No part of this communication may be reproduced in any form or by any means or re-distributed without the prior written consent of Oakbridge. This communication should not be construed as an offer to sell any investment or service. This communication does not constitute the solicitation of an offer to purchase or subscribe for any investment or service in any jurisdiction where, or from any person in respect of whom, such a solicitat ion of an offer is unlawful. If you are in doubt about the securities to which this communication relates, you should consult an independent financial adviser. The information in this communication has been prepared in good faith, however, no representation or warranty, expressed or implied, is or will be made and no responsibility or liability is or will be accepted by Oakbridge or its officers, employees or agents in relation to the accuracy, completeness or fitness for any purpose of this communication. The information stated, opinions expressed and estimates given are subject to change without prior notice.
The services described are provided by Oakbridge or by its subsidiaries and/or affiliates in accordance with appropriate local legislation and regulation. Certain products and services may not be available in all locations or to all Oakbridge clients.
Oakbridge is regulated in Jersey by the Jersey Financial Services Commission for the conduct of Investment Business.
Oakbridge is a limited company with company number 121454, incorporated in Jersey on 7 June 2016. Its business address is Weighbridge House, 2nd Floor, Liberation Square, St. Helier, Jersey, JE2 3NA.
Oakbridge is a registered business name of Oakbridge Limited.
Oakbridge forms part of the ED Group.