In light of a particularly tumultuous week on the markets – we’ve penned some ramblings and thoughts.
The summer rally, which we felt could have been the bottom, has now fizzled and reversed…
But why!?
We believe – in a nutshell – the markets have been consistently optimistic that inflation will tail off sooner rather than later (especially in the US). This drove the relief rally in late summer, which reversed very quickly when US CPI (Consumer Price Index) readings in September was higher than expected and followed by rhetoric of “destroying inflation” by the Federeal Reserve – at the expense of economic growth.
The rhetoric has softened somewhat to be more conservative, “inflation remains unacceptably high and well above the longer-term goal of 2%” and have lately said that they don’t expect rates to stay high until inflation comes all the way down to that 2% mark.
This gave us (and the markets) some optimism, which was then overshadowed by Truss and Kwarteng’s big change of policy direction on 22nd September, which nearly caused a global crisis. (Didn’t realise our domestic policy was so closely watched!!?)
The policy was certainly questionable, but we’ll never know how it may have played out in the medium to long term. For sure, the poor timing, rushed communication and lack of rationale was a mistake that has cost the ex-Chancellor his job and time will tell if the new PM can stay in place. The news is fast-moving…
The international markets didn’t like to see a major economy announce fiscal policy so at odds with its own monetary policy (set by the BoE) – really quite unprecedented, the cause and effect. Add in an escalation in Ukraine and it’s been a tough few weeks.
There’s not really been anywhere to go during this period that hasn’t been affected and assets across the risk/return spectrum, from defensive to aggressive, have been impacted.
Is there any cause for optimism? (yes, we think so!)
– Our managed portfolios have relatively high levels of resilience and this is where we see the dynamic of high diversification across geographies, sectors, asset classes. Times like this, when all assets classes align and go down in value together (capitulation) scream irrationality and emotion.
– When there’s crisis of confidence, the tide can (and does) turn quickly and, usually, unexpectedly. I think back to March 2009, when Lloyds was forced into the HBOS purchase and a majority share of RBS taken into public ownership; this was the apex of the crisis, but also transpired as the bottom of the bear market (and the start of a bull market that pretty much lasted from then until now).
– We saw a 6%-10% upswing from June to mid-August this year – solely on the back of expectation that the worst of high inflation expectations was behind. Yes, the rally was short-lived, but it gave us an insight of the recovery profile. We believe any indication that the worst of the inflation shock is behind us, and/or resolution in the Ukraine, and the environment is different. We’re just not sure that either of these will transpire this year… but we have confidence that the upside rally will be tangible and could transpire in the not too distant future.
– The combination of active and passive management styles in our portfolio fund selection means that we can control portfolio costs, diversify our holdings and see the portfolio shift about and change focus to find opportunity amongst the chaos.
– History tells us time and time again that a prolonged bear market is followed by a sustained period of bull market, although we should note the past performance should not necessarily be taken as a reliable indicator of future returns.
– Our Wealth Management strategy is driven by strong financial planning – i.e. we know and anticipate that times like this will and do occur. Subsequently, we know intrinsically that our investors’ “big picture” can sustain periods of volatility in exchange for long-term growth in excess of cash, inflation and most other measures on a risk-adjusted basis.
– We’re very close to events and news and constantly monitoring the portfolio for both threat and opportunity.
– Alongside the active fund management, we’re running regular tactical overlays and assessing scope for rebalance.
I hope the above helps to give you some further reassurance for now. Please don’t hesitate to contact your adviser regarding any other concerns or questions you may havve about meeting the long-term objectives of your financial plan.
