2022 has started with a bit of volatility in global stock markets. Higher inflation has led to expectations of sustained interest rate hikes. This will slow economic activity and take some of the liquidity out of the market, which is bad for stock prices. This has impacted technology stocks the most, as they attracted this excess liquidity through COVID. Given the defensive positioning of our Orca Global Fund and Orca Asia Fund, these Funds have outperformed the declining market by 1.7%1 and 1.4%1 respectively, protecting our investors’ gains. With technology related stocks under pressure, it was a more difficult month for the Orca Disruption Fund, which was -6.5%1 behind its benchmark index.
Few relationships are as complex as interest rates and stock prices. On the one hand, when the economy is super strong, interest rates rise, and stock markets generally rise too. On the other hand, when interest rates rise, investors require higher returns, which pushes down stock markets. There’s generally a bit of both going on, and the outcome depends on which effect is stronger.
Currently, the economy has been strong, which has driven markets up. Interest rates have been very low, which has also driven markets up. One of those conditions is changing, which had brought some volatility into the markets in December and January. If interest rates continue to rise, stock markets should come down further, but probably, in our view around the 10% range, rather than a disastrous crash. It would be far worse for stock markets if we saw an impending second COVID induced recession, which we don’t. With the MSCI World Index around 3000 at the end of January, we expect more upside than down.
We’re comfortable with the magnitude of market moves in January. Importantly, at this time of year companies report their 2021 profits, and the results have generally been strong so far. Sales for the December quarter are up 17% vs 2020 and profits are up 29%. We’ve seen some stocks that disappointed get hit hard, but these have generally been stocks with strong recent performance and high expectations. A large part of our work is to analyse the financials of our investments as they report them, and we don’t see areas of concern currently. It’s a higher cost environment, but economic activity is still robust, and the prospects for 2022 are good.
Investor portfolios should have done well in the last year. The MSCI World Index is up +26.1%, a historically high return, and our Orca Global Fund has been broadly in line with these moves over the last 12 months. This is impressive, considering our lower risk position and cautious holdings. We think that investors should look to protect the strong gains in their portfolio at this time of the market. Stock markets are still attractive though, as the current profit reports are showing, but investors don’t need to chase risk at this stage. The Orca Global Fund declined 0.7%1 , outperforming by 1.7% in January.
Asian markets were flat in January (MSCI Asia ex Japan: -0.2%), and our Orca Asia Fund outperformed by 1.4%. We view Asian markets as highly attractive for the long run, and out of synch with strong US stock markets. Over the last year the Asian market fell -4.0%, particularly due to a perceived increase in China political risk, but the Orca Asia Fund rose +2.1%1 , 6.1% ahead of the benchmark.
There’s been a lot of activity in Australian funds management recently, and we anticipate more to come. At Orca, we’re finalising our ESG report for the Orca Asia Fund, and hoping to meet with clients in coming months. We are proud of the products we’re delivering to our clients, and hope to continue to assist you for many years to come.