Markets are now in a “time of genuine crisis” but there are three long-term themes emerging from the noise, according to Andy Merricks, co-manager of the 8AM Focussed fund.
In the past 12 months equity markets have been upended by rising interest rates and inflation, causing the previously dominant themes and sectors to struggle, growth especially.
The fast-growing parts of the market have taken a hit, with many of the well-known growth funds losing more than 30% in the past three months.
All of this was worsened by Russia’s invasion of the Ukraine, which sent most equities spiralling.
“You know you’re in trouble when you look at the list of best performers on the day on the FTSE All Share index and they consist of Chemring, Qinetiq, BAE Systems, Avon Protection and Babcock International – each of them involved in the development of weapons and defence-related items and systems,” Merricks said, commenting on the FTSE’s moves the day Russia’s invasion began.
During such a difficult human event it feels wrong to talk about money, Merricks said, “but assuming we can still invest for the long term, it makes sense to us to concentrate on the themes that the world will need in the years ahead.”
For Merricks, these include cyber security, cloud computing and alternative energy sources. Looking at cyber security first, this theme has received a lot of attention since the war in Ukraine began as the threat of cyber warfare has increased.
The National Cyber Security Centre (NCSC) in the UK put out an official alert, urging UK companies to “strengthen their cyber resilience in response to the situation in Ukraine” in anticipation that they could be targeted.
Merricks said that this sector has jumped in value because of this; last month, various cybersecurity ETFs rallied.
The theme had been building momentum prior to recent events though, as the world has become more reliant on digital and online solutions, a dependency that was accelerated during the pandemic when entire industries had to transition to working from home and adapt their security measures.
Cloud computing fits in tangent with this theme, providing the internet infrastructure to allow these digital shifts to happen, but it goes further than that, Merricks said.
“It’s got the ability to absorb and process an ever-greater demand for data and functionality for all of us as our use of the internet does nothing but expand.”
When geopolitical uncertainty is heightened, cloud computing can provide some level of continuity in the face of it, taking away the reliance on a physical server for people, businesses and governments, he added.
“Effective cloud and cybersecurity systems can keep things operational when other facilities are closing down.”
Moving onto the third area, alternative energy sources have taken a hit in the past year, despite a rally in energy stocks. Rising inflation has driven up energy costs, with oil and gas prices surging before the Ukraine conflict but accelerating since.
The price of Brent crude oil rose above $119 (£89.71) a barrel this week, the highest level since May 2012, and the average UK petrol prices also hit a new record. Domestic energy also rose, with households now expecting their energy bills to rise significantly this year.
Renewable energy stocks have not participated in this rally though. Indeed, the iShares Global Clean Energy UCITS ETF – one of the most popular passive products within this theme - has lost 12.4% in the past year.
Merricks pointed out the irony that this sector was down given the amount of coverage climate change and ethical investing has had in the past year via COP26 and governments pushing forward on zero-carbon policies, but ‘bad’ areas like tobacco and armouries were now up.
“Despite the recent rise in oil and gas prices acting as a reminder that the world is not yet ready to convert fully to alternative energy sources, has the appetite waned for adopting wind, solar and hydrogen as the foundation for energy usage going forward?” Merricks asked.
“Is this really what the future looks like and have we been getting it entirely wrong in the funds that I help to run?”
The manager argued it was not, saying that Russia’s attack could actually become a powerful driver to fast track the development of alternative energy resources.
He said “urgency can be a powerful tailwind” and Europe’s dependency on Russia for oil and gas “has acted as turbo charge to the alternative energy sector” to find a way out of that dynamic.
This momentum had even reached the US, which is not as dependent on Russian energy, but still had a round of “record-breaking sales” for the rights to develop a wind farm off the coast of New York and New Jersey.
Merricks added that while many of these growth sectors have taken a hit with rising inflation expectations “they are actually quite defensive in times of genuine crisis. And this is something that we can probably all agree on – this is a time of genuine crisis”.