June 2022

The Storm before the Calm

Events seem to be conspiring to unsettle investor confidence, which leads us to increase emphasis on protecting value as much as seeking to increase it. Inflation is rising and, unless curbed soon, will lead to sharp increases in interest rates. Both factors look set to prompt increased wage demands at a time of full employment. This combination is already proving toxic in technology markets with prices falling and funds hard to secure. Russia is suddenly advancing in Ukraine and George Soros warns in the Daily Telegraph that Ukraine could be the start of a Third World War. The Financial Times adds to the cheer by indicating that technology stocks in the US are now in a traditional bear market.

We are now basing strategy on a tough couple of years where an underlying priority will be securing solid income to tide investors over any period of market volatility. Long term interest rates seem likely to increase, and the usual effect of authorities increasing short term interest rates in response is to tip economies into recession, to bring inflation under control. This places a premium on stocks that are liquid, have strong cashflow, which in turn permits rising dividends. In bond and credit markets the safest places are in short duration or early maturity dates; cash becomes more attractive as well.

There is talk of a possible pause in the US of increasing interest rates as sharply as recently indicated, in the early autumn. However, continuing pressure on energy and cereal crops suggest this hope might be short lived, and we face even harsher interest rate increases slightly later. We hope to use this period to storm proof your portfolio as much as possible and leave it in a strong position when these crises abate.

The UK is usually the poor relation of global markets with the FTSE 100 not much higher than in 2000 when markets peaked. Large capitalisation stocks have often been overshadowed by faster growing new and smaller companies with investors willing to wait until they developed and matured. Now companies suffer sharp valuation declines and sometimes worse as additional funding comes at much lower levels, or not at all.

Much is changing on a global basis, and Soros now criticises the previously well-regarded Angela Merkel for leaving Germany hostage to Russian gas, and to China for their major export market. In the short term we will have to be patient on the ESG (Environmental, Social & Governance) front as wind power cannot propel cargo ships and solar panels cannot put planes in the sky. The understandable pressure to protect the planet has come at significant cost to security. As income generating companies in, say, the energy sector have been discarded (so that it only represented 2% of the main index at the low point) opportunities have been created for investment managers prepared to use the full palette of investment choice.

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

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May 2022

Coincident Factors

The Russian invasion of Ukraine has been the exception to the generally modest impact that geopolitical events have had on global markets. As such, it has had a catalytic effect on underlying trends that had previously seemed containable. The traditional remedy since the financial meltdown in 2008/9 in the US has been to decrease interest rates and increase money supply. Both strategies have been taken, broadly, to extremes. At the same time, Covid has disrupted supply chains, compounded in the UK by the difficulties of Brexit.

The impact on Ukraine, in addition to human misery for so many, has been to severely restrict the supply of grain from one of the largest exporters. Similar pressure has been felt in the energy market, where the threat of restricted gas supply has sent prices soaring.

In aggregate, tighter monetary conditions, rising inflation and tougher trading conditions are likely to result in narrower margins for the majority of companies.  Our task is to find the minority that thrive in these conditions. We will look to include companies that benefit from rising commodity prices, rising interest rates and rising inflation. We have seen in past cycles the emphasis that investors put on immediate returns in these conditions, including some element of yield, strong cashflow with little balance sheet debt and valuations that do not require multiple years of growth to justify current lofty ratings.

As an example of changing trends, it is interesting to note that the previously buoyant rating of NASDAQ has dropped sharply since November, and the apparently more sedate Berkshire Hathaway holding run by Warren Buffet has caught up with it. This seems a clear indicator that in a rising interest rate environment, investors will pay more for immediate certainty and income, and less for long term growth prospects that require a higher valuation discount, as the more distant growth will be curtailed in real terms by inflation.

As we move from an era of Quantitative Easing to Quantitative Tightening, resulting in higher interest rates, this dictates that we need to re-deploy funds to protect your portfolio by seeking out beneficiaries of such changes. The factor that is likely to create some market confusion in the interim is that the year-on-year inflation rate will hopefully slow as we grow accustomed to higher food and energy costs.  However, real incomes will have fallen and corrective action has not yet been taken to correct this. The damage that can be caused by ignoring inflation can be seen in Turkey where the central bank was overruled on interest rates, and less than a year later inflation surged to 30%. US and UK authorities are talking about tough action, but already they may be behind events which require prudent action now.

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

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April 2022

The Winds of Change…

Since our last publication of View from the Square, the wider market outlook has changed dramatically. While a humanitarian tragedy continues to unfold in Ukraine, markets have proved to be somewhat resilient in the face of mounting macro-economic concerns. To put it candidly – traders have been insensitive to both the humanitarian and macro-economic issues unfolding. We disagree with this viewpoint on a one to two year view, despite the “music still playing” and markets recovering in recent weeks from their earlier selloff. For now, we continue to benefit from these trends, but we are positioned more conservatively than previously given the longer-term implications at play.

Just yesterday, the US government bond yield curve started to invert – a signal whereby the yields on shorter dated bonds begin to exceed those of longer dated maturities (in this case, the US 2-year government bond yield has risen above that of the 10-year yield). This has historically proved to be a fairly reliable indicator of an impending recessionary environment. While several of our peers and a chorus of economists are suggesting that “this time is different” (a phrase we generally approach with extreme caution) as the inversion is being driven largely by shorter term expectations rather than a much longer-term decline in growth and/or inflation assumptions, the outlook is far from as healthy as it once was.

Consumers are being hit by a number of key inflation factors, ranging from energy prices to commonly purchased goods in their supermarket baskets. The fundamental driver of this is not just a rise in energy prices, but also weakened global supply chains. The latter is a combination of the Covid pandemic and the ongoing deglobalisation trend we are witnessing from the Russian war on Ukraine, in addition to geopolitics surrounding technology nationalism and the redrawing of supply chains. The recent announcement of Intel’s $88bn European expansion is just one such example of this, as large companies begin to “wise up” to these trends and look to protect their access to key markets – we suspect that others will be less prepared and caught out by this trend over the coming period, which would likely continue to erode consumer confidence.

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

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March 2022

Keep Calm and Carry On

The events of recent weeks in Eastern Europe have dominated TV, radio, newspapers and online news. These events have also seen market sentiment deteriorate as investors increasingly price in the prospect of damage to the global trade environment. Meanwhile, the prospect of a greater inflationary burden than was anticipated at the beginning of the year has also led to a repricing of risk, as the supply of key energy sources has come into question, pushing the price of oil to a 7 year high.

There is no doubt, that certainly in the short-term at least, the global growth outlook has deteriorated because of the war between Russia and Ukraine. Western powers have responded swiftly with sanctions which will hurt the Russian economy. Even the historically neutral geographies such as Switzerland and Monaco have joined in this, which is unprecedented relative to previous wars.

As with many matters in life, the most important element is how you respond to challenges, uncertainties and sources of volatility. To this end, it has been noteworthy over recent days that the economic restrictions on Russia have been applied more quickly and more thoroughly than in other historic geopolitical crises. Unfortunately, it has not yet stopped the invasion of Ukraine, but it has significantly heightened the rationale for a return to peace.

Markets are priced for a medium-term disruption in certain sectors, but not priced for a broader disaster. You can see this in “safe haven” assets (such as government bonds, the Japanese Yen etc), where the flight to safety has, so far, been measured. The big issue going forward, as far as we see it, is the potential for a further rise in inflation and, in particular, key commodity prices. It is already looking as if central banks have moved too slowly to combat this issue.

The invasion of Ukraine may now make rises in interest rates less likely in the short term but also more necessary in the medium term as inflationary pressures grow.  Unfortunately, events also make it likely that the post-Covid economic recovery we have been looking forward to will be weaker, especially in Europe. Raising interest rates to control inflation when economies lack resilience can lead to stagflation (high level of inflation, accompanied by a low degree of economic growth) and unhappy times for equity investors.

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

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February 2022

Spiking the Punch Bowl

January 2022 has not started where 2021 left off. The all-time highs across various equity markets last year have receded on the back of concerns surrounding inflation, which has caused central bankers across the globe to consider raising interest rates and reducing asset purchases. The US Federal Reserve (the Fed) has indicated that several rate hikes over the course of the year are planned, in addition to “rolling off” the Fed balance sheet, by no longer providing the same degree of ongoing purchases of low-risk assets (such as government bonds) from the US banking system. A reduction in banking system liquidity, in conjunction with a rising interest rate outlook, has not been taken well by investors this month, with equity indices falling across the board.

Asset prices across various investment markets, including key equity and bond markets, are being impacted by a rising cost of capital as a result of the US base rate rising. This is because asset valuations are calculated with consideration of the level of interest rates, with additional discounting in price considered for any rise in this key measure, as well as inflation and/or perceived asset-specific risk.

The base case now is for 5 rate rises this year of 25 basis points, which would raise the US target base rate to 1.25-1.5%. At the turn of the year, the market was braced for one rate hike by the May meeting. Now it has fully priced in two, which many believe will come in the form of a blunderbuss 50 basis points hike at the next Federal Open Market Committee meeting in March. Within 12 months five hikes are now priced as a certainty. That’s a radical shift in expectations and investors now appear to fear that the Fed may be spiking the proverbial market’s punch bowl.

The effect the Fed is hoping for is a reduction in the rate of inflation, which is now running at an uncomfortably high figure of 7%. While an element of this is no doubt due to the one-off substantial rise in several input costs because of a recovery in post-pandemic economic activity, there is a fear that some of this may prove to be “sticky” or even prove to be self-reinforcing. We expect the headline figure of 7% to fall over the coming period, but we do however expect it to remain relatively higher than it has been in recent years.

This issue is not isolated to the US, with the Bank of England also poised to raise interest rates later this week from 0.25% to 0.5%, with the market anticipating gradual rises to eventually reach 1.2% by year end. We expect that some of this hawkish interest rate outlook is already priced into markets, however we do expect some volatility over the year ahead as expectations wax and wane upon consideration of unpredictable inflation prints over the course of the coming year.

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

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January 2022

Waking up to Inflation?

2021 ended with a modest “Santa rally” with markets demonstrating some upside in late December on improving trading volumes, after a rather flat performance earlier in the quarter. The FTSE All-World share index rallied 16.7% (in dollar terms) in 2021, surpassing the previous year’s 14.1% gain. Concerns surrounding the Omicron variant, its relative potency and likely impact on markets were gradually weighed by investors during the final quarter which, in November, put a pause on the “risk-on” sentiment from earlier in the year. This reluctance to add to existing equity positions appeared to dissipate later in the period as concerns over the severity of Omicron started to recede.

Looking forward to 2022, we remain cautiously optimistic as the latest data surrounding the newest Covid variant increasingly points towards a lower proportion of hospitalisations and deaths, despite its greater transmissibility. The impact on the global economy is, therefore, likely to be less negative than prior variants. Meanwhile, households and corporates have built up excess savings, and credit conditions have eased. At the same time there is considerable pent-up demand in global services and inventories.

While there is much to be optimistic about, we believe that the current environment presents a strong case for active investment management, rather than simply chasing a broad market trend through passive investing. We are concerned about excessive valuations in certain sectors at a time when the US Federal Reserve is likely to tighten monetary policy and inflation is rising. These trends have historically negatively impacted the technology sector in particular, which has been a market leader for over a decade now and trades on generous valuations in the large-cap space. 

The option market has historically been a more accurate predictor of interest rate movements than the aggregate view of Federal Reserve members. Option-implied interest rate expectations are based on the forward-looking interest rate expectations, which investors have speculated on via option contracts. The option market currently suggests that three US rate hikes in 2022 appear likely. This is with the intention of helping to reduce inflationary pressures, which are presenting themselves across inventory, supply chains and ultimately, consumer prices.

We have been positioned for such a trend for almost a year now, with increased allocations to value stocks and real assets (such as infrastructure and property) which should benefit investors as this trend persists. Monetary policy makers and market participants are now more broadly waking up to the possibility that the current pricing pressures may not just be “transitory”, as was previously the consensus view. With inflation and interest rate rises likely to persist throughout 2022, we are particularly focussed on businesses with strong competitive positions, pricing power and access to structural growth drivers. Although broad index valuation multiples for equities are a challenge at present, certain sectors, such as healthcare, consumer goods and financials, appear to offer plenty of opportunities. We believe that this type of selective investment approach will provide a more profitable outcome for investors, rather than passively tracking the wider market in 2022. 

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

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December 2021

A Fine Balance

As the year draws to an end the customary “Santa rally” for stocks may be on hold this year as uncertainty surrounds the new COVID strain –Omicron. Markets have become relatively immune from COVID news over the last six months, even as new strains have emerged and waves of infection come and go.  However, this latest strain appears to have the attention of markets. It will be a couple of weeks yet before we have a clearer picture on the speed of transmission and severity of the new strain. In the meantime, investors are likely to remain on edge. In this environment, we have seen continued support for “COVID winners” (e.g. technology and healthcare sectors). Elsewhere, inflation isn’t going away and finally central banks (notably the Federal Reserve) are starting to accept this. More entrenched inflation next year will likely favour cyclical areas of the market. As we prepare for a new year, true portfolio balance –blending assets associated with growth and inflation –becomes even more important. 

Just when we thought we were out of the woods, along comes another COVID curveball in the form of the Omicron strain which, at this early stage, appears to be one of the most infectious yet. Equity markets sold off aggressively on the news but stabilised somewhat into month end. As has become customary on COVID news, certain sectors fare better and worse as COVID sentiment swings. For now, we don’t think this is cause for a major market meltdown but an element of caution on the pace of recovery is merited. The base case is that this new strain becomes manageable. 

When we began the year we were confident that this would be a year of economic growth, but with some uncertainty of the magnitude and pace. Overall, it looks likely to be a very solid year for economic expansion globally as the world recovers from the pandemic and equity markets have, broadly, responded in a positive manner for the year. However, the second year of a recovery can often be more volatile for investors and returns not as strong. As we enter 2022, investors also have to contend with a macro environment not seen for several decades –that of significantly higher inflation. The narrative (from most central banks) for much of 2021 was that of “transitory” inflation, caused by idiosyncratic effects of the virus (such as a boom in used car sales). However, we have long argued that inflation is likely to be more entrenched and higher than central banks are giving credit. It appears that the US Federal Reserve has come round to this view –now looking to drop the “transitory” narrative from their inflation outlook and consider taking action to curb inflationary forces. In the event that inflation continues to run above trend and economic growth continues to rebound –our base case for 2022 -this will favour cyclical sectors. However, investors should balance inflation protection in portfolios with exposure to structural trends that continue to evolve in areas such as clean energy transition and ongoing digitalisation. These trends tend to favour quality growth sectors. 

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

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Fourth Quarter 2021

The benign market equity investors enjoyed over the summer months, and for much of the last year, came to an abrupt halt in September, as volatility returned to markets. There were all manner of events for bears to get their teeth into – from the impending default of one of China’s biggest property developers (Evergrande), to a brewing energy crisis stoking inflationary fears. Filling up your car will cost you nearly £1.50 a litre, and a beer at your destination will set you back a great deal more than it did before the pandemic. It is abundantly clear that inflationary pressures are re-emerging and less transitory than central banks have anticipated. Investors should prepare themselves for the possibility of a stagflation winter – characterised by slowing economic growth and rising inflation.

For investors in a multi-asset portfolio, this will likely mean having a below benchmark weighting in bonds. Inflation is a bond investor’s nemesis and especially so in the current environment – starting from a very low base (in yields). But outside conventional bonds, investors can look to inflationlinked bonds, which seek to provide a degree of inflation protection; or floating-rate notes, which see coupons rise with interest rates. Within equities, companies with low levels of debt and strong pricing power are likely to fare well in such an environment. Value stocks (such as banks, industrials and resources) could also have a renaissance after a summer lull and typically fare well when inflationary forces are present. And finally, some exposure to real assets (commodities, gold, infrastructure and property) appears prudent. Whilst this latest bout of inflationary pressure will be a concern for central banks, the transitory narrative (inflation being elevated for a short period of time) is still the base case rather than inflation spiralling out of control. Over the medium term the market believes inflation will run at 2-4% and this has historically been a good environment for stocks.

We are in little doubt though, that the autumn volatility in markets has some way to run through the rest of 2021 and we will likely continue to see sentiment ebb and flow on inflationary dynamics, as well as the outlook for economic growth. Worries over the health of the Chinese economy is real and the situation with property developer Evergrande has some of the hallmarks of the beginning of the financial crisis, which Chinese authorities will wish to avoid at all costs. The opportunities for active management (both in asset allocation and security selection) appears more abundant than over much of the last decade (where assets rose in unison), as investors adapt to a new post pandemic regime and adjust portfolios accordingly.

Opinions constitute our judgment as of this date and are subject to change without warning. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it may go down as well as up. Interested parties should seek advice from their Investment Adviser. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority. Registered in Scotland SC231678. Registered Office Edinburgh Quay, 133 Fountainbridge, Edinburgh EH3 9BA.

October 2021

Earnings to the Rescue (Again)

After a volatile September, where markets were focused on macro headwinds –slowing growth, Chinese property sector woes, surging inflation and rising bond yields –October has been an altogether more positive affair. And the simple reason –company earnings. Investors were expecting supply chain issues, slowing growth and rising costs to have a material impact on third quarter earnings. However, most companies appear to have navigated these issues relatively unscathed and CEOs have been rather more positive on the outlook than expected. Midway through the earnings season it looks set for another strong set of results from companies across most sectors. The last two months of the year have historically been favourable ones for investors but, after the strong gains seen so far this year and a number of macro headwinds still present, will the allure of equities –from the positive results season –begin to fade into year end?

As October passes, we again find ourselves reporting record highs for global equities. Investors came into the latest earnings season rather more cautious than in recent quarters –global growth had been showing signs of slowing, supply chains were severely disrupted, and inflation was rapidly becoming more entrenched and more elevated than many had anticipated. As a result, forecasts had been managed down for this earnings season, leading to over 80% of companies beating analysts’ estimates on earnings at the half-way point. Whilst that sounds like reason for seasonal cheer, “analysts” appear rather poor at gauging company results each quarter as the long-term average of companies beating expectations is in the region of 70%, leaving anything below this seemingly weak. A perplexing phenomenon where one would reasonably expect the long-run to be closer to 50%, if markets are efficient and analysts’ good at their jobs! Nevertheless, earnings continue to rise and, in recent quarters, supported by more cyclical sectors such as banks and energy, rather than the COVID winners, such as technology, which propelled earnings in 2020. Beneath the surface there were signs that some of the big name technology companies are feeling the supply chain pinch – both Amazon and Apple disappointed in the last week of October. Alongside this, the social media giants had a roller-coaster month following Apple’s new privacy changes. SNAP’s (Snapchat) 25% share plunge in a day reminded us of the sensitivity of lofty valuations in certain sectors as soon as the mood music turns.

So, where does this leave investors into the year end? With over half of S&P companies having reported, attention may soon turn back to the worrisome macro factors at play. However, climbing these walls of worry has been a hallmark of this long-standing bull market since the financial crisis. And so, as long as there are no credible investment alternatives (to equities) and the bond market doesn’t go into all out melt-down (where yields jump higher and prices fall), there is little reason to not remain invested in equities. However, as we have mentioned in previous monthly notes –investors may wish to diversify their risk exposure into alternative real (inflation sensitive) assets, such as property, infrastructure, commodities and gold, giving portfolios more ballast to both (economic) growth and inflation dynamics. 

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

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September 2021

 Winter is Coming 

The benign market that equity investors enjoyed over the summer and for much of the last year, came to an abrupt halt in September, when volatility returned to markets. There were all manner of events for bears to get their teeth into – from the impending default of one of China’s biggest property developers, to a brewing energy crisis stoking inflationary forces. Winter appears to be arriving early in the UK: with the end of Furlough; the £80-a-month boost to universal credit; and the cut to housing stamp duty. If you manage to find a pump, filling up your car will cost you nearly £1.40 per litre, and a beer at your destination will set you back a great deal more than it did before the pandemic. It is abundantly clear that inflationary pressures are re-emerging and less transitory than central banks have anticipated. Investors should prepare themselves for the prospect of a stagflation winter – characterised by slowing economic growth and rising inflation.

However, that is not to say investors should be throwing in the towel in the equity bull market just yet. Whilst we are seeing economic growth slowing, we do not believe it to be recessionary. Therefore what is important is purposeful asset allocation to position for real (inflation beating) returns, over time. For investors in a multi-asset portfolio, this will likely mean having a below benchmark weighting in bonds. Inflation is a bond investor’s nemesis and especially so in the current environment – starting from a very low base (in yields). But outside conventional bonds, investors can look to inflation-linked bonds, which seek to provide a degree of inflation protection or floating-rate notes, which see coupons rise with interest rates. Within equities, companies with low levels of debt and strong pricing power are likely to fare well in such an environment. Value stocks (such as banks, industrials and resources) could also have a renaissance after a summer lull, and typically fare well when inflationary forces are present. And finally, some exposure to real assets (commodities, gold, infrastructure and property) appears prudent. Whilst this latest bout of inflationary pressure will be a concern for central banks, the transitory (inflation being elevated for a short period of time) narrative is still the base case rather than inflation spiralling out of control. Over the medium term the market believes inflation will run at 2-4% and this has historically been a good environment for stocks.

We are in little doubt, however, that the autumn volatility in markets has some way to run through the rest of 2021 and we will likely continue to see sentiment ebb and flow on inflationary dynamics, as well as the outlook for economic growth. Worries over the health of the Chinese economy are real and the situation with property developer Evergrande has some of the hallmarks of the beginning of the financial crisis, which Chinese authorities will wish to avoid at all costs. The opportunities for active management (both in asset allocation and security selection) appears more abundant than over much of the last decade (where assets rose in unison), as investors adapt to a new post pandemic regime and adjust portfolios accordingly.

Important Information

Opinions constitute our judgement as of this date and are subject to change without warning Neither CS Managers Ltd, CS Investment Managers nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this document. CS Investment Managers is a trading name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority.

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