Investment Comment
26th September 2022
Crises, what crises?
After the fiscal event on Friday, markets have made their view known. Sterling fell against the US Dollar by 3.2% on Friday, to $1.09. In Asia, trading on Monday morning fell to a low of $1.035, another 5%. In the views of experienced (and calm) commentators, the UK currency is trading akin to an Emerging Market currency of old. When bond yields rise (as they did) and the currency falls, faith in the policy backdrop is broken.
Historically, falls in sterling have increased inflation. So, the job for the Bank of England to control inflation has got harder, and they may raise interest rates further in coming weeks. With the UK housing market starting to slow (from very inflated levels), rate increases may deepen the slowdown and worsen the recession the UK will experience in coming months. A risk, (a small risk, but one that would result in a full-blown currency crisis) is that the new Prime Minister follows through on her unguarded comments to review the Bank of England’s inflation mandate. The perception of a potential change in the independence of the Bank would be taken poorly by markets, especially when the government is already perceived by some to have a poor grasp of economic reality.
For clients with diversified portfolios, structured around a global equity framework (as most are) then a fall in sterling is sometimes mitigated by the overseas equity component. Whilst the pound in your pocket is worth less, the dollar components of your portfolios are worth more (in sterling terms).
One change, and opportunity that has arisen over the past few weeks, is the rise in gilt yields. Whilst still below the inflation rate, the rise in yield does portend a better expected future return than was the case when yields were below 0.5% in 2020.
Sterling may remain out of favour until the current policy proves it is effective and can control the deficit and inflation. The alternative is a different policy mix that demonstrates the ability to deliver sustainable economic growth. For the time being, risks to sterling remain weighted to the downside. Longer-term overseas companies may start acquiring UK assets as the fall in sterling has resulted in lower acquisition prices. In the meantime, we remain watchful over risks, and opportunities.
Gerard Lane Chief Investment Officer
Artorius provides this commentary in good faith and for information purposes only. All expressions of opinion reflect the judgment of Artorius at 26th September 2022 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content.
The value of investments and the income from them could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance of an investment or asset class is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice.
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FP20220926001 Exp 24/10/2022