Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

THE war raging in Ukraine is fast turning into a humanitarian disaster and now represents a real threat to the country’s continuing independence. Our thoughts are with Ukrainians everywhere, as are our hopes for a swift end to this crisis.

Addressing our own financial challenges and opportunities in the current climate may seem strangely at odds with the tragedy of the events unfolding in Ukraine. But it is something we must do, however unpalatable the geopolitical backdrop.

Investing for the long term requires us to be alert to the many risks we shall see along the way, while maintaining a constant vision of our long term goals, whatever events are placed in our paths.

To avoid timing our investments to coincide with what we might assess as being a favourable period ahead – an approach fraught with its own dangers – diversification remains the best way to help usher our portfolios towards the time we shall be needing them to fund our life events.

Diversification was the watchword this week, as Fidelity Personal Investing logged the latest trends among fund buyers, investment director Tom Stevenson revisited his fund picks for 2022 to find out if anything had changed, and fears around the effects of the war in Ukraine on global food prices came to the fore.

Funds investors bought in February

Fund purchases at Fidelity Personal Investing last month suggest investors are increasingly approaching the current environment based on two distinct premises.

The first is that inflation and uncertainty are here to stay, requiring a more diversified approach to portfolio building. The Ninety One Global Gold Fund made it into the top-10 best-selling funds at Fidelity Personal Investing for both ISAs and SIPPs, while the BlackRock Natural Resources Growth & Income Fund also made a fresh appearance.

Investors went into the Ukraine crisis already concerned about inflation, and the latest developments are only likely to make matters worse.

With commodity prices going up in leaps and bounds (more on that later) it makes sense to have an exposure to the beneficiaries. Gold has the additional benefit of having a long track record of maintaining its value during geopolitical shocks.

At the other end of the spectrum, funds with sizeable weightings in the technology sector remained popular, including the Rathbone Global Opportunities Fund and Fidelity Global Special Situations Fund.

Purchases of these and other funds with large positions in technology companies come after the respected technology investor and founder of Ark Invest Cathie Wood was quoted as saying in late January “innovation is on sale”1.

Clearly, there are substantial numbers of investors that see the downward adjustment in technology share prices since the end of last year as an opportunity to accumulate.

Fidelity’s Investment Director Tom Stevenson revisits his fund picks for 2022

In light of developments in Ukraine, which have cast a cloud over investment sentiment, Tom Stevenson revisited his fund picks for 2022 this week. He found nothing had fundamentally changed. As a result, his picks remain: Fidelity Global Special Situations Fund; Ninety One Global Gold Fund; Artemis UK Select Fund; and Baillie Gifford Japanese Fund.

In Tom’s view, these funds are well-positioned to capitalise on three themes likely to persist over the year ahead, namely: Shares are still the place to be versus bonds (Fidelity Global Special Situations); inflation concerns are likely to continue (Ninety One Global Gold); the US stock market’s leadership would be challenged this year by less highly rated markets (Artemis UK Select, Baillie Gifford Japanese).

How Ukraine will affect food prices

Greater food insecurity and rising food prices were issues born out of the Covid-19 pandemic. According to the World Bank, the pandemic reversed gains in global poverty reduction for the first time in a generation.

Now the problem looks set to get worse. Russia and Ukraine are the world’s largest and fourth largest exporters of wheat. They’re also major exporters of other cereals and substantial suppliers of sunflower seeds and vegetable oils2.

As Fidelity’s Ed Monk pointed out this week, the war could impact the production and distribution of these vital commodities. Harvests next season could be affected too, if the region’s production of fertiliser gets disrupted.

This is bad news for the world’s leading consumer goods producers such as Nestlé, Procter & Gamble and Unilever, as they will be forced to withstand yet higher input costs only in the hope of being able to pass these on to consumers.

It’s also evidently bad news for consumer discretionary companies, as consumers themselves will be required to spend a greater proportion of their incomes on household staples.

Defence stocks – should we be paying more attention?

Germany’s decision last week to increase its overall spending on defence to 2% of gross domestic product from 1.5% in 2021 has boosted the sector. Germany is now on course to spend in excess of €100 billion on defence this year alone3.

Somewhat predictably, defence and cybersecurity related shares around the world have risen since the conflict in Ukraine began. In the UK, BAE systems and the government defence technology company QinetiQ are among those to have seen their share prices rise4.

The UK’s Darktrace, a cyber-security specialist that uses artificial intelligence, has also caught the attention of investors. On Thursday, the company reported sharp rises in interim revenues and profits to 31 December and significantly upgraded its revenue guidance for 20225

Despite recent surges in the prices of defence stocks, it’s important to remember that each will ultimately be examined more closely based on its individual merits in more peaceful times. Moreover, it is down to the individual investor on whether their moral stance and ESG principles will see them investing in this controversial sector.

Stocks are still the best place

Interest rates may be rising, but they probably won’t be rising far compared with history. After its policy setting meeting early last month, the Bank of England noted that markets expect UK interest rates to rise only as far as 1.5% by the middle of 20236.

In that case, and in an environment where inflation is topping 5%, the yields we are likely to see from cash deposits over the next year will not be nearly enough to be attractive to investors. Shares, on the other hand, can still be expected to generate competitive total returns (capital growth plus income) over time, albeit, that higher interest rates will reduce the underlying profitability of some companies.

It’s undoubtedly riskier investing in shares than cash or bonds, but neither of the latter two asset classes can offer investors anything like inflation-busting returns (with the notable exception of index linked bonds). Staying the course with shares continues to look sensible.

Source:

1 FT, 26.01.22
2 Agricultural Market Information System, 25.02.22
3 Reuters, 27.02.22
4 Bloomberg, 03.03.22
5 Darktrace, 03.03.22
6 Bank of England, 03.02.22

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Eligibility to invest in a SIPP or ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). The Fidelity Global Special Situations Fund, Ninety One Global Gold and Baillie Gifford Japanese Fund invests in overseas markets and so the value of investments can be affected by changes in currency exchange rates. The Fidelity Global Special Situations Fund also invests in emerging markets which can be more volatile than other more developed markets. The Fidelity Global Special Situations Fund and Artemis UK Select Fund use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The Ninety One Global Gold Fund invests in a relatively small number of companies, so may carry more risk than funds that are more diversified. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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