Investment
Comment
24th June 2022
Being boring
“A successful central bank should be boring”, said former Bank of England governor Mervyn King back in 2000.
That proved somewhat easier in the “NICE” decade (“non-inflationary constant expansion”) than it is today in what Oxford Economics have called a “MESSI” period (“moderating expansion with sticky supply-driven inflation”). The main tool available to Central Banks is to raise or cut interest rates, typically they would raise rates to reduce inflation and cut them to stimulate growth. Thus, the current scenario of slowing growth in an inflationary world leaves them in an acute dilemma, should they raise interest rates to tackle inflation knowing that this risks slowing the economy and possibly triggering a recession? Or leave interest rates low to support the economy, while letting inflation run wild? Therefore, perhaps Central Banks could be forgiven for being less than boring.
Many more existing trusts, which were previously exempt, will now have to register and trustees will be responsible for ongoing self-declaration duties and annual returns.
The deadline to register a trust where trustees haven’t yet been liable for any tax is 1st September 2022 (or 90 days from trust creation if later). For trusts that have already been or are liable to tax for the first time, the 1st of September 2022 replaces all former deadlines as the earlier of the two.
Last week the US Federal Reserve (“Fed”) raised interest rates by 0.75%, the biggest rise since 1994 and by more than they had guided markets. Indeed, one of the biggest shocks to markets this year has been the shift by Central Banks. Investors started the year expecting modest interest rate rises but in short order expectations have surged, driving up bond yields (and subsequently driving down bond prices), which has caused a significant derating in equity markets and a dramatic rotation away from high (and speculative) growth companies towards more defensive assets.
This week the Chairman of the Fed, Jerome Powell, has been explaining his actions to the US congress. He reiterated that his commitment to reigning in inflation was “unconditional” and markets now expect a further 0.75% rate rise at their next meeting in July and rates to rise above 3% by the end of the year. He also acknowledged that a recession was possible and that achieving a soft landing would be very challenging.
Market concerns are now clearly focused on the risk of recession. So far, while economic data has weakened and there are signs of a slowdown many economic indicators remain positive, albeit at a slower pace of growth than seen post-pandemic.
As we discussed in our recent Investment Outlook, the combination of falling equity prices and rising profits leave equity markets on a much more attractive valuation than seen over recent years.
We believe that there are signs of a peak in inflation pressures (at least in the US), and if this leads to the Central Banks easing the pace of monetary policy tightening, this could lead to a more constructive investment backdrop.
For now volatility is likely to remain high and we expect to see swings on news flow as investors continually assess inflationary and recessionary risks. This market volatility is unsettling but historically not unusual. To reiterate from our recent Investment Outlook, if you’ve built an appropriately diversified portfolio that matches your time horizon and risk tolerance, it’s likely the recent market drop will be a mere blip in your long-term investing plan.
Summer of discontent
The UK this week saw strikes by rail workers creating widespread disruption. We also saw British Airways staff vote for strike action and we fully expect to see further action across other sectors. High inflation is hurting real incomes and those workers that have bargaining power are, unsurprisingly, making use of it. So far wage rises are not matching inflation rises and companies are able to offset cost rises with price rises to maintain margins.
Yesterday saw discontent against the UK government manifest in two significant by-election defeats for the Conservative party. In Wakefield Labour won back a “red-wall” seat lost at the last election and, more surprisingly, in Tiverton and Honiton where the Liberal Democrats won a resounding victory and took a seat which has been blue since 1923. However, very little about these by-election results is truly surprising.
The Conservative government is not popular, the Prime Minister is very unpopular, inflation is high and consumer confidence is low. Having already survived a vote of no-confidence it remains to be seen if this has any impact on Boris Johnson’s position as Prime Minister. It does suggest, however, that policies popular with Conservative voters and politicians may be to the fore to secure that position. Whether this makes any difference to the path of the UK economy is questionable. The UK is feeling global inflationary pressures acutely and is forecast to grow slower than most other major economies. However, the significant fiscal stimulus announced last month to offset the energy price shocks has reduced the likelihood of recession, somewhat improving the outlook.
With this in mind and with sterling back towards post-Brexit lows, we recently hedged some of the US dollar exposure in our portfolios.
Gareth Thomas
Head of Investment Management
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