Yesterday, the Bank of England raised interest rates by 75 basis points (0.75%). This follows a similar move by the Fed in the US, 24 hours earlier. This is all in an effort to tame runaway inflation, which stands at a 40-year high. With predictions of a deep and protracted recession for the UK economy, should I consider selling my stocks and moving to cash?
Focus on the long term
The first thing I’m not doing is panicking. By historical standards, interest rates are still extremely low, particularly given the fact that inflation is running at 10%.
At the moment, central banks are trapped between a rock and a hard place. They know that if they raise rates too high and too quickly, both the economy and stock market are very likely to crash. However, if they take their foot off the interest rates accelerator pedal, then inflation could get completely out of control.
What’s concentrating the minds of market commentators is how long central banks are likely to keep raising rates before they begin to ‘pivot’. The theory goes that once such an announcement is made, then this will be the cue for stock markets to begin rising again.
As an investor with a long-term mindset, I find this exercise completely fruitless. What I continue to remain focused on is identifying stocks I wish to buy.
Value vs growth
In 2022, investors have been rotating out of growth stocks and into value ones. With the exception of Apple, the FAANG stocks are all heavily down. Meta, for example, is down 70% this year. Does this mean that I see value in such stocks?
What continues to make me nervous about technology stocks, is their valuations. Many of them are still priced for perfection. That’s why many growth stocks have fallen so heavily when they haven’t met analysts’ expectations. DocuSign is but just one example here.
In addition, the longer inflation remains elevated the more likely it is that tech stocks will continue to fall. This is because their present valuations are based on what the market expects their future cash flows to be worth. But when discounted back to the present day, the effects of inflation mean the cash flows aren’t worth as much.
Stock market crash
The truth is that I have no idea whether a stock market crash is on the horizon. And trying to time the market in the hope of predicting one is a recipe for disaster. Yes, there are storm clouds out there, but I also see a lot of value, particularly in the FTSE 100.
Commodities stocks look extremely cheap to me. Both BP and Shell have forward price-to-earnings (P/E) ratios in single digits. That’s despite them having a high degree of certainty with regard to their near-term cash flows.
Banking is another industry where I’m starting to see real value. Rising interest rates are pushing up their net interest income. That said, I’m less keen on banks whose balance sheets are more heavily weighted toward mortgage assets.
Despite all the doom and gloom, I remain optimistic. There are bargains to be had, it’s just a matter of looking for them.
