Client Update - 8th July 2022

There can be no question what the biggest story is for UK investors this week. Boris is gone, well, almost. After numerous brushes with an early exit from his role as Prime Minister, Boris Johnson has finally been given no option by his party, with resignations aplenty, than to finally stand down. Whilst the final date is as yet undecided, the race has already begun to identify who will replace him and try to lead the Conservative party out of its current predicament. From an investment point of view, it will be interesting to see how the UK economy copes with this period of political stalemate and how the Sterling currency will react. So far this year Sterling has continued to fall and remains 8% below the trade weighted levels pre the EU referendum in June 2016.

At this moment in time, I am not sure I can add any more value to the Prime Minister debate than that you have all gleaned from today’s news, however it will be interesting to see the type of personality put forward to lead the Government, to wrangle with Labour and the Liberal Democrats and to represent us on the world stage. Is there a candidate who can provide the country with more of the same, do the party want that – probably not. The continued resilience of the UK market versus global peers could be tested if a suitable resolution is not found over the summer.

After years of disappointing returns, it is true that UK large cap equity market has finally outperformed the US in 2022, principally because the UK stock market has a higher weighting to Oil & Gas and financial companies. These types of stocks have been boosted by the short-term spike in commodity prices and higher interest rates. Despite this, most global portfolios remain overweight to North America. In order to provide some context relative to the UK, America has greater food and energy self-reliance, its economy is nearly ten times larger, on average its population earns a third more, and it has a stock market that is fifteen times more valuable. For further perspective, last September one US company (Apple Inc.) had a greater market capitalisation than the largest 100 companies in the UK combined; today this one firm is still worth more than the combined value of 75% of all UK listed businesses. In general, earnings growth and the quality of balance sheets is superior for companies listed in New York, when compared to London. Having said all of this, we are happy to have a good holding of our portfolios in both markets and over the years, this has proven a sensible strategy.

Away then from politics, for now. This week I came across a new word to describe the current ailments of companies fighting increased cost of production – Skimpflation. It seems the term is being used where companies are cutting back, or skimping, on what they provide to their customers, while continuing to charge the same amount or more. While shrinkflation generally refers to products shrinking in physical size, while the cost remains the same, skimpflation relates to the quality of the product or the service. Examples include consumers waiting longer for items they have ordered to be delivered, airlines cancelling flights and hotels reducing the frequency of housekeeping services, as companies struggle with rising costs and labour shortages. The inflationary pressures continue, for now.

Our quarterly reporting to clients invested in our advisory model portfolios on Quilters, or the discretionary portfolios on 7IM will begin shortly, along with our usual array of market views. It has indeed been a difficult start to the year, however, should we start to see slowing inflationary pressures and weaker demand, leading to less threatening central bank guidance, the assets we have been picking up at low valuations year to date, look well placed to perform strongly when the markets rebound.

I am away now for a few weeks, so I wish you all well and I shall write again on the 29th July. I hope you are enjoying your summer so far.