A difficult start to the year for the world’s innovators

It’s been an exceptionally challenging time in the markets since the start of the year – especially for innovative, climate focused companies. As a result, our three model portfolios have posted negative returns over the month of January, and up to 11 February.

●  Adventurous: -10.88% , Benchmark: -5.56%¹

●  Balanced: -8.92% , Benchmark: -4.86%²

●  Cautious: -6.25% , Benchmark: -4.16%³

So what’s been happening to cause this downturn, and why? Let’s explore the context, starting with commodities, and energy prices in particular. Oil prices have recently risen to levels not seen since 2014, with WTI Brent crude up 20% and the Bloomberg Commodity Index (which is largely exposed to energy) up by 10% since the start of the year. This may come as a surprise to many, coming just three months after COP26. But given the post-pandemic demand spike for energy and parallel squeeze on supply chains, this brewing energy crisis has been on our radar for a while. In addition, geopolitical tensions on the Russian-Ukrainian border have caused further uncertainty in energy markets, and in turn a spike in both oil and gas prices. 

Inflation is changing investor behaviour

As our 2022 market outlook report says, these rising energy prices (along with food, labour and housing) are pushing up inflation. In fact, the most recent US CPI data, released on 10 February, exceeded expectations from some economists, with prices increasing 7.5% year-on-year compared to an expected 7.3%. And because inflation is currently the most pressing issue in this time of slowing, late-cycle economic growth, we believe that central banks are likely to hike interest rates – and soon. In our view, this is causing investors to rapidly shift away from more expensive, long-term, growth-based investments towards prioritising cash flow in the short term.

Unsurprisingly, high-growth tech companies are taking a hit as a result, including those involved in green energy, climate tech and clean mobility. So while oil and gas was the best performing sector overall, global equities are down 6.3% from the start of the year (MSCI World Index). In the same vein, Shell and Exxon were up 25.7% and 30.5% respectively, while Tesla and Orsted were down 19% and 19.5% (Factset, as of 11 February). 

The price for your portfolio

These developments have had an impact on your portfolio. The following table details the three best and worst performing funds in our model portfolios (Factset, as of 11 February).

Best performers

Worst performers 

Compared to equities, fixed income has been relatively resilient, with the benchmark index (Bloomberg Barclays Global Aggregate Index) down only 3.73% since the start of the year, due to the yield curve flattening⁴ (Factset, as of 11 February).

Watching for the winds of change

While we hardly welcome these short-term results, we remain convinced that we’re pursuing the right strategy for maximising positive climate impact and generating financial returns longer term. And for the rest of Q1, we’ll be keeping a close eye out for answers to the following questions we posed in our 2022 market outlook report:

• Can central banks walk a line between addressing inflation via interest rate hikes and quantitative tightening⁵, without putting the economic recovery at risk?
• Will inflation drivers such as the price of energy, food, used cars and housing start to calm down in the coming months, thus easing the pressure on central banks?
• Will global supply chain constraints like lack of freight options, labour and component shortages derail growth prospects?

Right now, the signals we track on micro and macro economic developments are mixed. And as long as the markets remain volatile, it’s hard to predict which path monetary policy makers will take based on the data we have. But we are watching closely, reviewing our portfolio strategy regularly and acting at the right times in your interest.

With investing, your capital is at risk. Past performance is not a reliable indicator of future performance.

1 We have measured the performance of our Adventurous portfolio against a benchmark based on comparative portfolio composition data made up of 75% MSCI World Index and 25% Barclays Global Aggregate Bond Index. 

2 We have measured the performance of our Balanced portfolio against a benchmark based on comparative portfolio composition data made up of 50% MSCI World Index and 50 % Barclays Global Aggregate Bond Index.

3 We have measured the performance of our Cautious portfolio against a benchmark based on comparative portfolio composition data made up of 25% MSCI World Index and 75% Barclays Global Aggregate Bond Index.

4 The yield curve plots the yields of bonds with the same credit quality, but different maturity dates. So a steepening yield curve indicates that the spread between short-term and long-term maturity is growing wider. When this spread narrows, the curve flattens. Bond prices are generally inversely correlated with the yield curve.

5 Quantitative tightening is the opposite of quantitative easing. Given that quantitative easing can be described as a central bank buying assets (such as government or corporate bonds) which thus expands their balance sheet and increases the general liquidity in the market, quantitative tightening is therefore a central bank selling off these assets, or simply letting them reach maturity. In essence, quantitative tightening reduces the size of a central bank balance sheet, and reduces the amount of liquidity in the market.