Investment Insights Notes from the Kitchen

Investors Park the Bus

  • Feb 24, 2022
  • Andrew Gillham

(Cover Image Source: Chan Lee)

Jose Mourinho has gained a reputation for “parking the bus” at times, setting up his teams to defend deep, and in numbers, to withstand the attacking threat of difficult opponents. As concerns over inflation and escalating Cold War-like tensions continued to unnerve markets last week, many investors took a page out of the football manager’s playbook and retreated into defensive assets such as government bonds, precious metals and cash.

The outflows from stocks pushed European and North American indices lower and the blue-chip S&P 500 and FTSE 100 fell 1.2% and 0.6% respectively.

Consumer goods companies, including Heineken and Nestlé, were among those to report earnings last week, and inflation was a common theme.

Heineken’s chief executive Dolf van den Brink warned cost inflation is “off the charts” and “across the board we are faced with crazy increases”. The price of malted barley, the key ingredient for producing lager, has more than doubled over the past year and the shortage of truck drivers has ramped up delivery costs.

The Dutch brewer will pass on these costs by raising the prices of its brands, which also include Amstel, Birra Morreti and Tiger, but cautioned this could lead to lower beer consumption, especially as many households are already squeezed by the higher cost of energy, food and clothing.

Nestlé reported net profit rose 38.2% to SFr16.9 billion last year, boosted by the sale of part of its stake in L'Oréal for almost €9 billion in December. Nestlé now owns 20.1% of the French cosmetic manufacturer and will use the sale proceeds to buy back more of its own shares.

The company also revealed a strong uptick in demand in the fourth quarter for coffee, pet food and health foods which benefitted from the “at-home revolution” during the pandemic. The strength of its brands enabled Nestlé to push through average price increases of 2.1% and 3.1% in the past two quarters and CEO Mark Schneider asserted higher input costs in 2022 will “have to reflect in our pricing” to protect operating profit margins.

The prospect of central banks raising interest rates to curb multi-decade high inflation has hit bond markets hard this year but against repeated warnings of an imminent Russian attack on Ukraine, government bonds regained some of their allure as a safe-haven asset. UK Gilts returned 2.0% last week.

Investors also sought shelter from the storm in precious metals such as gold (+1.9%), as well as cash. A Bank of America survey of fund managers suggests cash positions are at the highest level since May 2020.

Oil prices remained in thrall to the news flow on the Ukraine crisis and fell after it was reported that the US and Russian leaders had agreed in principle to a summit brokered by Emmanuel Macron. However, they quickly reversed direction when Kremlin officials played down the prospect and Brent Crude moved to a 7-year high after Vladimir Putin ordered troops into two rebel-held regions in eastern Ukraine.

Cryptocurrencies lost ground as jittery investors exited more speculative assets. Bitcoin and Ethereum fell 12.2% and 11.4% respectively. The recent volatility, however, hasn’t deterred some major financial institutions from taking a more active interest in digital assets. JPMorgan became the first bank to enter the metaverse, opening up its Onyx lounge in blockchain-based Decentraland, and Sequoia Capital, which typically invests with a very long-term time horizon, set up a new fund to deploy at least $500 million into cryptocurrencies.

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.