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Global funds sector review – inflation reaching record highs

With inflation reaching record highs across the globe, we look at how different economies and regions around the globe have been coping, and how global funds and stock markets have performed.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

In one way or another, we’ve all felt the effects of inflation this year. Following 30 years of relatively stable rates of inflation in the UK, rising prices have recently come back with a vengeance.

In our latest global sector review, we look at the latest inflation numbers, how stock markets have performed, and the impact on some of our Wealth Shortlist global funds.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. All investments and any income they produce can rise and fall in value, so you could get back less than you invest.

Inflation hits new highs

Rising energy prices, constrained food supplies, and global supply chain disruptions have pushed inflation to new highs this year.

The UK’s inflation rate reached a 40-year high of 9.1% in May, putting pressure on households and businesses alike. But it doesn’t stop there. The Bank of England expects inflation to exceed 11% in October.

One problem with inflation is that it can become a self-fulfilling prophecy if it persists for too long. For example, if consumers expect prices to rise in future, they might increase spending now to take advantage of relatively lower prices. But greater demand can lead to higher prices.

A cost-of-living crisis can also increase demands from workers for higher wages. This then increases costs for businesses, which can force them to increase the prices of their goods and services.

Similarly, corporate profits could get squeezed as input costs (e.g. the cost of materials) increase. If businesses raise prices to offset costs, but without the intention of reversing them, this could help inflation remain sticky.

Over the medium term, economists predict inflation will come back down to a more sustainable level. But in the meantime, things could prove painful for many individuals.

Inflation has risen in other parts of the world too. In the US it rose to 9.1% in June, the highest level in 40 years. Again, rising energy costs have played a key role, as has service-related costs, including those linked to the travel industry.

Elsewhere, eurozone inflation reached 8.6% in the year to June. The region has been hurt by supply disruptions caused by Russia’s invasion of Ukraine, especially as, among other things, it has historically been a big importer of Russian gas.

Global central banks have tried to come to the rescue by raising interest rates, aimed at stemming inflation. Even the European Central Bank, which has been slower to respond with tighter monetary conditions, is expected to start hiking rates throughout the second half of 2022.

Much of the world’s global inflation problem is out of the hands of central banks though, with rising oil & gas prices as the main drivers of inflation. To add to that, there’s a balance to be had in raising rates. While they might help in stemming inflation to a degree, higher rates also have the potential to push debt levels higher and the world into recession.

How have global markets performed?

It’s been a volatile year for global stock markets, against the backdrop of rising inflation, an invasion, and the ongoing coronavirus pandemic. There was a mixed performance from major stock markets over the 12 months to the end of June 2022, as investors contended with the uncertain economic and market backdrop. As always though, past performance isn’t a guide to future returns.

In the UK, the FTSE 100 held up relatively well, growing 5.76%* compared with a loss of 2.83% for the broader global market. Larger UK companies in sectors including oil & gas, aerospace & defence and healthcare performed strongly over the period.

However, higher-risk UK small and medium-sized companies were much weaker, falling by 14.64% and 16.10% respectively. When investors are nervous and in ‘risk-off’ mode, smaller companies have tended to bear the brunt and not hold up so well.

China was the weakest market over the year, falling 21.39%. It struggled amid heightened regulation from China’s authorities, lockdowns due to rising Covid-19 cases and the potential impact on global supply chains.

That said, China’s market has recently seen a reversal in fortunes and was the only major market to deliver a positive return (11.44%) in the latest quarter (three months to the end of June 2022). Last month, it seemed as if President Xi and his party would relax their stance, and market sentiment improved. There’s potential for this optimism to prove to be short-lived though, as there’s also been news that a new variant threatens new-found freedoms.

In terms of investment styles, growth investing has continued to suffer. This style of investing focuses on companies with high growth prospects or the potential for higher earnings in the future. Rising inflation is typically a headwind for this style, as it reduces the value of future cashflows.

Globally, the oil & gas sector has performed exceptionally well over the past year, with a UK and US ban of Russian oil and gas imports helping to push up commodity prices. Performance is still volatile though, and the sector has been weaker more recently.

One year stock market performance

Past performance isn’t a guide to the future. Source: *Lipper IM, to 30/06/2022.

Name % Growth % Growth % Growth % Growth % Growth
30/06/2017 to 30/06/2018 30/06/2018 to 30/06/2019 30/06/2019 to 30/06/2020 30/06/2020 to 30/06/2021 30/06/2021 to 30/06/2022
FTSE 100 8.73 1.56 -13.80 18.01 5.76
FTSE Small Cap ex IT 6.36 -8.63 -12.29 65.20 -14.64
FTSE World 9.35 10.44 5.82 25.47 -2.83
FTSE China 17.35 -2.69 17.64 14.28 -21.39

Past performance isn’t a guide to the future. Source: Lipper IM, to 30/06/2022.

It might seem that there’s almost always a reason not to invest – in the last few years alone we’ve seen Brexit, the pandemic, and war. The truth is, there’s usually never a bad time to put your money to work, as long as you’re investing for the long term – five years or longer.

Taking a long-term approach with your investments helps cut out the short-term noise and with it, the worries about finding the right time to invest. As always though, there are no guarantees and stock markets can fall as well as rise.

How have our Wealth Shortlist funds performed?

Global funds on the Wealth Shortlist delivered different performances over the past year, with some faring better than others.

We expect this given they use a variety of different styles and investment approaches. If all funds in a sector are performing well at the same time, they're probably investing in similar areas. Those areas won't perform well all the time, so it can be painful when they're out of favour. Remember, this is over a very short timeframe. Past performance also isn’t a guide to future returns.

All investments fall as well as rise in value, so you could get back less than you invest. For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Over the past year, Trojan Global Income has been the best-performing global Wealth Shortlist fund. This fund aims to provide a growing income by investing in companies from across the globe. While growth-focused funds have struggled over this time, funds focused on value or dividend-paying stocks have tended to fare better.

The managers of this fund also take a more conservative approach to investing. They focus on more defensive areas of the market, which have the potential to provide some resilience when markets go through tougher times.

Artemis Global Income and Fidelity Global Dividend were the next two best-performing funds. Again, these funds aim to pay a growing income over time. The former fund tends to focus on areas of the market that are more sensitive to the economy. The latter is more defensive, meaning it will likely have less ups and downs. This again reminds us that different investment styles will come in and out of favour.

ASI Global Smaller Companies was the weakest performer. The managers use a growth-focused approach, which as mentioned has been out of favour since the end of 2021. Smaller businesses also haven’t done as well as larger ones over this time, which has also hampered returns, as has some weaker stock selection.

The fund is likely to perform better when growth investing is in favour, but not so well when value companies are in vogue. The fund, and its managers, have a good long-term record, and we rate the team’s disciplined investment approach that has been used across a range of funds over the years.

Name % Growth % Growth % Growth % Growth % Growth
30/06/2017 to 30/06/2018 30/06/2018 to 30/06/2019 30/06/2019 to 30/06/2020 30/06/2020 to 30/06/2021 30/06/2021 to 30/06/2022
Trojan Global Income 2.64 15.73 6.30 7.28 7.32
Fidelity Global Dividend 1.66 17.84 4.99 10.35 0.33
Artemis Global Income 8.65 -3.55 -9.99 33.19 1.51
ASI Global Smaller Companies 27.21 -0.45 7.30 33.17 -27.43
IA Global 9.41 7.33 5.60 26.14 -8.72

Past performance isn’t a guide to the future. Source: *Lipper IM, to 30/06/2022.

FIND OUT MORE ABOUT TROJAN GLOBAL INCOME INCLUDING CHARGES

TROJAN GLOBAL INCOME KEY INVESTOR INFORMATION

FIND OUT MORE ABOUT ARTEMIS GLOBAL INCOME INCLUDING CHARGES

ARTEMIS GLOBAL INCOME KEY INVESTOR INFORMATION

FIND OUT MORE ABOUT FIDELITY GLOBAL DIVIDEND INCLUDING CHARGES

FIDELITY GLOBAL DIVIDEND KEY INVESTOR INFORMATION

FIND OUT MORE ABOUT ASI GLOBAL SMALLER COMPANIES INCLUDING CHARGES

ASI GLOBAL SMALLER COMPANIES KEY INVESTOR INFORMATION

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    Our fund research is for investors who understand the risks of investing and that investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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