The market is gradually coming to its senses
Rising inflation is making markets focus on "jam today" over "jam tomorrow" with investors switching from growth stocks to value stocks.
When things change they often change very quickly. Look at your portfolio and you will see what I mean. The growth stocks and funds that have been making you money for years have tanked: shares in Scottish Mortgage are down 28% in three months. Value stocks are soaring: BP is up 40% in six months. And the fact that the UK offers a degree of inexpensive safety is beginning to be recognised. The MSCI World index has fallen around 6% so far this year. Thanks to its cash-producing, dividend-paying miners, energy producers and banks, the MSCI UK index is up 3.6%. If this carries on, 2022 could be the first year the UK has outperformed the world since 2011.
It is hard to shake the feeling that we are witnessing a market gradually coming to it senses – recognising that it is possible to overpay even for great companies. Richard de Lisle of the De Lisle America Fund gives the example of Adobe. Its fundamental business is fantastic. It has grown its earnings by 19% a year on average for a decade and can probably continue to do so. It’s also down from $700 to $500. However, even at that price it is still on a price/earnings ratio of 50 times. Back in the early 1980s (when US inflation was last 7.5%) that kind of growth was priced at more like 20 times earnings. Adobe is a “fine name”, but right now, says de Lisle, “maybe not where you want to be” given how far the price has to fall – or the earnings rise – for the valuation to be reasonable.
This is a point you can make about pretty much every growth company on the US market – and one that anyone who thinks the rotation from growth to value is coming to an end might bear in mind. Rising inflation (now 5.5% in the UK) is making markets focus on jam today over jam tomorrow – and if valuations are to normalise into this environment, the shift has hardly begun.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The grim future of money
One of the ways fund managers cope with their worries is to hold more cash. You’ll be tempted to do the same (see this week's magazine for how to save some). But in inflationary times, I’m afraid holding cash leads us inevitably into conversations about the nature of money. You might turn an eye to Canada where we are being offered a less amusing hint about the future of money. Earlier this week Justin Trudeau declared a state of emergency. Part of the power that gives to the state is financial: any bank can now freeze the personal bank accounts of anyone they suspect is linked to the protests with no further legal process.
There’s a lot to ask about all this. But the key thing to note for now is that the pandemic has hugely expanded the range of tools governments feel it’s OK to use to control people’s behaviour. It isn’t our job to have a view on vaccine mandates (though I reckon you could guess mine) or truckers’ protests. But we worry about financial repression, about the loss of financial privacy and about the financial control digital cash offers the state. Last year the Bank of England discussed making a central bank digital money programmable – such that the issuer could decide how it was able to be spent. So perhaps no booze for alcoholics, no luxuries for those on welfare, no fuel for lorry drivers in the wrong place… see where this can go? And how fast it can happen?
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Best funds to add to your ISA or SIPP before the Budget
With Labour expected to increase taxes, ISAs and SIPPs could be a great way to protect yourself from any CGT hikes. We look at the best funds to buy now
By Katie Williams Published
-
Starling Bank slapped with £29 million fine over ‘shockingly lax’ financial crime controls
The Financial Conduct Authority has fined Starling Bank £29 million over failings related to financial crime and its financial sanctions screenings
By Kalpana Fitzpatrick Published
-
Qualcomm could acquire rival Intel – but securing the deal won't be easy
A tie-up between Qualcomm and its semiconductor rival Intel would be a coup. But multiple regulatory and commercial hurdles lie ahead.
By Dr Matthew Partridge Published
-
Modi’s reforms set Indian stocks on fire
Indian stocks pass a new milestone, but global fund managers are holding back. Are there signs of overheating?
By Alex Rankine Published
-
How to invest in the quiet market months
Here's how to invest in the quiet market months, since “sell in May” hasn’t paid off this year.
By Cris Sholto Heaton Published
-
Spire Healthcare: invest in the booming demand for private healthcare
Spire Healthcare is one of the few listed companies benefiting from the growing trend in private healthcare. Should you invest?
By Rupert Hargreaves Published
-
Are insurance companies a good investment?
Costs may be soaring but the insurance sector is currently going through one of its most profitable periods. The market has been slow to realise the opportunity here
By Rupert Hargreaves Published
-
Google's legal challenges – could it be broken up?
Google is fending off legal challenges from both the EU and the US. But would breaking it up actually work?
By Dr Matthew Partridge Published
-
Fast-growing bargain stocks the market has missed
A professional investor recommends attractive stocks to invest in. This week: Dan Higgins, portfolio manager, Majedie Investments, highlights three favourites
By Dan Higgins Published
-
Are matchboxes worth collecting?
TikTok is reigniting a spark for matchbox collecting. Is there any value in phillumeny or will it fizzle out?
By Chris Carter Published