15 June 2023

Investing in a High Interest Rate Environment – How Did We Get Here?

Investing in a High Interest Rate Environment – How Did We Get Here?

Investors will rightly feel very confused and conflicted with the direction of their portfolio and the outlook for the immediate future. In the past 18 months or so, markets have been subject to a series of very significant macro-economic events.

If we go back to 2009 and the aftermath of the Global Financial Crisis, the main remedy (alongside the nationalisation of certain banks) was the dropping of base interest rates to historic lows.

It was always likely that a period of inflation would transpire in the following decade and that base rates would need to ‘normalise’ to keep demand in check. The general consensus was that policymakers could be ‘slow and steady’ with their tightening and return to a level in a calm and orderly fashion, creating what is known as a ‘soft landing’.

This position was beginning to play out when the COVID-19 global pandemic hit. This was followed in relatively quick succession by the Russian invasion of Ukraine. These events served to throw the global supply/demand balance into disarray.

A spike in post-pandemic demand for goods and services (combined with seriously constrained supply chains) led to inflation much higher than previously forecast and central bankers scrambling for control. Last year, base rates rose at an incredibly high rate, from close to, or at, 0% to 4% and beyond. Rates have continued to rise into this year too.

The true effect of rate rises is not seen for many months afterwards and this is playing into the current “non-direction” of capital markets. It is our belief that we are through the worst of these events and as time passes we get closer to a point where central banks can take their foot off the brake and signal a re-acceleration.

For now, our advice is to focus on the longer-term plan, maintain a high level of diversification and engage with active management and advice to ensure that threat and opportunity are reflected in equal measure.

As is often quoted, “time in the market beats timing the market” – with investor patience being rewarded over the medium to long-term.

In fact, our blog Why inaction is a crucial part of successful investing drills into why the action’s you decide not to take are just as important for your portfolio to be successful.

Staying invested and keeping to an agreed financial plan is the optimum approach to keeping your pension strategy on track

If you are worried that you ‘should’ be doing something, we’ll be covering off our current strategy and thinking in our regular review meetings. In the meantime, we are always  here to answer questions and offer advice and guidance. Simply having someone that has your best interest at heart to talk to will provide peace of mind and affirmation in what remains an uncertain macro-economic environment.