It was a day of shock yesterday as the European Central Bank lifted rates for the first time in 11 years. That the ECB chose to hike was not a surprise – it had said it would do so last month – but the pace raised eyebrows.
Indeed, the central bank upped its rate by 0.5 percentage points, double the expected 25 basis point hike many had predicted. The larger increase is in response to higher-than-expected inflation, which in the eurozone hit a record high of 8.6% in June, up from 8.1% in May.
Inflation is proving pesky across the world. Earlier in the week, the Office for National Statistics revealed the consumer prices index (CPI) hit 9.4% in June. This is the highest in almost four decades.
Some experts argued that things will get worse before they get better, with the Bank of England’s forecasted peak of 11% look too optimistic, considering further energy price rises expected in the autumn.
It implies therefore that investors should gear up for more of the same in the second half of the year, which is handy, as this week Trustnet looked at the funds that investors have been buying and selling during this unprecedented array of economic conditions (although Andy Merricks said that you could broadly compare now to the early 1980s, should you wish to).
Baillie Gifford funds have taken a battering so far in 2022, with investors ditching the Scottish investment giant’s growth style in favour of value funds.
This is unsurprising: high interest rates impact the future earnings of fast-growing companies and encourage people to pay more for those that are producing reasonable returns in the short term, such as oil majors and banks, which have thrived on higher prices and rates respectively.
Quality-growth funds such as Fundsmith Equity have also been sold in the first half of the year. The types of stocks that have won this year tend to be more cyclical in nature, rising and falling depending on the overall market conditions, so are rarely viewed as ‘quality’. Few managers that invest in this way will therefore have had much (if any) exposure to this year’s winners.
Income funds have performed well, however, as stocks that pay high dividends also tend to be among the most unloved. After all, the higher the dividend, the more risk the market thinks there is associated with the income on offer.
Meanwhile, companies that pay any dividend at all are generally accepting that the money cannot be used to fund growth in other areas and is therefore best spent by rewarding shareholders.
This is great for companies that are established and churn out reliable growth each year, but it does mean they are unlikely to appear in growth portfolios.
The trend could of course come crashing back down in the second half of the year. At some point, investors will believe that the tech, healthcare and other growth names that have been hammered in 2022 has gone too far and start to allocate back to old favourites.
Whether that happens in the next few months, particularly with central banks in full-on hiking mode, remains to be seen.