Economic Commentary – January 2022


At our last commentary, we spoke about the vaccine rollout being the light at the end of the tunnel, and now it very much feels that we are at the beginning of the end of Covid 19.  Whilst the uncertainty of Omicron persists throughout January, we are in a much better position than we could have possibly dreamed, compared to March 2020 and January 2021.

Now it’s time to turn to the aftermath of Covid 19 and the disruption that has occurred.  Something we think you will hear more of throughout 2022 and beyond, is the problems to the global supply chain and the ‘Just in Time’ model that has been used throughout the world almost perfectly for the last 40 years.

The ‘Just in Time’ supply chain is simple enough, in that it aligns raw materials from suppliers directly with production schedules.  A car manufacturer doesn’t need to hold stock of an engine part, rather they receive the part when they are ready to install it, this increases efficiency and cuts costs.  Covid 19 has slowed global supply chains as ships, containers, and drivers have been disrupted across the world, with parts in the wrong place and at the wrong time!  We saw this at the beginning of Covid 19 in 2020, when everything from surgical masks, PPE, ventilators, drugs, etc., which were in huge demand, could not reach their destinations.  Throughout 2022 the global trading system will need to slowly unwind and realign, but this will come at additional cost.

Through necessity, 2021 pushed forward disruption technology, which allowed the world to continue business through various lockdowns and working from home; businesses have had to get smarter as illustrated below.

  • The implementation of 5G will see more countries and cities have faster internet connection.  With faster speeds and larger capacity, we will start to see more “things” interact with each other.  Buildings which can regulate temperature in real time, warehouse equipment (robots) that can communicate with the entire warehouse ecosystem.  Remote healthcare can expand, where doctors do not need to be in the same room, or even the same country to diagnose and treat a patient.
  • With companies forced to move their workforce into the living room, Chatbot and Smart Assistants have become more popular.  The Artificial Intelligence (AI) bots are continuing to learn, improve and help customers, without the need to speak to a human being.
  • 3D printing continues to develop and allows people to create what they need in-house, and this technology could disrupt mass production manufacturing and goods transportation.
  • Further advances in automation and robotics, our Covid modern society has unique demands that demonstrate the potential usefulness of say, robots administrating care in assisted living, or drones that can handle contactless delivery.

One of the key moments in 2021 was COP 26 (The UN Climate Change Conference), where global leaders made the following resolutions to try to keep global temperature rises within 1.5C of pre-industrial levels.

  • Coal is to be phased out
  • Financial commitments were given to the developing world
  • Fossil fuel subsidies are being phased out
  • More than 100 countries agreed to stop deforestation
  • Financial organisations controlling $130 trillion agreed to back clean energy and direct finance away from fossil-fuel burning industries.

These were important steps, but there is further to go.  But world governments are now putting climate change at the heart of the policy and decision making, which will now affect policy making decisions into the future.

 

Gould Financial Planning View January 2022

Cash

Despite our concerns with rising inflation, we are still recommending clients hold a high cash position.  We are looking to protect against two different risks, volatility and inflation.  As risk managers, taking a higher cash position, allows us to add further to positions in equities, while overall keeping clients within their agreed risk parameters.

Loans and Debt

We are keeping Loans and Debt at the “lowest” levels within client comfort zones.  Lending to governments or companies doesn’t appear attractive to us in 2022. With the prospects of rising interest rates, we are recommending that the bulk of these assets are invested with Strategic Bond fund managers, who have the tools available to them to navigate choppy waters with a small allocation to renewable infrastructure debt where appropriate.

Property

Property will be at the Mid-Point of comfort zones.  We are still working towards a large Infrastructure position, with diversifier holdings in UK Commercial Property and Property shares where appropriate.

Mixed

We are keeping our position at the highest allowable.  We see mixed assets as the ballast in our portfolios employing the ‘boots on the ground’ approach.

UK Equity

We are maintaining a maximum weighting with a bias towards flexible fund managers that can invest across the market cap spectrum.

Overseas Equity

Again, we are maintaining the maximum weighting. The slight change we have made in this space is to allocate more funds to global smaller companies, but overall, we are retaining our core-satellite approach when it comes to developed equity VS the less mainstream holdings. 

Past performance is not a guarantee to future performance and the value of investments and the income from them can fall as well as rise.






Article published: 11/01/2022

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