A shot in the foot!!

Saturday 1st October 2022

It's hard to work out why there was a need to push the extra unexpected tax cuts in the recent mini budget as our new Prime Minister, Liz Truss, seems to have followed her recent predecessors and shot herself in the foot.

The market had built in the expected reverse of the previous National Insurance Contribution and Corporation Tax increases and of course the help by capping the energy prices. The additional measures seem to have been a step too far and in particular not being accompanied by the Office for Budget Responsibility Analysis, which is now expected in November. The swift action is that of our Prime Minister and her Chancellor in a hurry trying to get much needed growth back to the UK after 10 years of relative stagnation and only 2 years, before the next election, to achieve this, or at least convince the public the policy will work. For more detailed analysis of the mini budget and it's impact follow this link to a review by LGT Wealth Management.

This has all deflected from the US inflation numbers released in the middle of September with a hope they would shows signs of reducing being ill founded. This continued inflation problem will embolden central banks to continue increasing interest rates, likely faster and to a higher level than previously thought. The expected end game for interest rates in the US and UK has moved from 3-4% to 4-5%.

Recession seems inevitable and indeed we believe is already upon us and could be argued is the price of bringing inflation back down. Rising interest rates and falling economic activity will drive down asset prices, and what is so unusual is that interest rates are usually falling when there is economic weakness and we hit recession. This is the issue this year and, regardless of your risk level, funds have fallen in value. Shares and fixed interest securities usually counter balance each other and the lower risk you are the more is held in the safer fixed interest area. This year though due to increasing interest rates and a looming recession both are falling.

Bear Market

The result of all this is a bear market defined by values falling more than 20%. Mike Fox, who manages Royal London's Sustainable Funds, we always think talks common sense and we felt his comments on his bear market experience very appropriate:

"Bear markets are part of investing; they come, and they go. Equity markets rise around 7 out of 10 years. For the other three, usually a recession or a shock, such as Brexit, dominates. It started around the turn of the year, which makes it nearly 9 months in length, with key markets such as the US S&P 500 and Nasdaq down 20-30%. This is an average bear market up until now, both in time and scale. Of course, there are bear markets which have lasted longer than this with larger falls. The bear market of 2007-2009, which coincided with the financial crisis of those years, lasted 17 months and the S&P 500 fell 50%.

I managed the sustainable funds through the financial crisis of 2007-2009. It was a uniquely unpleasant experience. It tested the resilience of investors to the core, and some did not come through it. This is a great shame, as what followed it was a 12-year bull market of size and scale that enriched many people's lives. Here are some of the things I learnt:

• The key challenge of operating in bear markets is psychological. News tends to be relentlessly negative and gets worse as the bear market progresses. This cumulative effect is corrosive and usually leads to bad decision making.
• Even the worst bear markets end. Over time, economies grow, and corporate profits benefit from that. Bear markets are the exception, not the rule.
• The ending of a bear market requires resolution of the core issues creating it. Back in the financial crisis it was when governments stepped in to shore up the banking system, that started the crisis, which eventually turned the economy and markets around. This bear market started with inflation, and it will end with inflation.
• The beginning and end of bear markets is only obvious in hindsight. This is because they usually start and end with a largely unforecasted event. Timing them is hard to do.
• For truly long-term investors, bear markets allow the accumulation of investments at more favourable prices (as the saying goes, you pay a high price for a happy consensus, conversely a low price for a miserable one!) They must be tolerated to deliver a successful long-term outcome.

None of these points is to say we, or indeed anyone else, knows where markets will move in the next few months. No one has privileged access to the future. They are though points which, after this bear market is long gone and we look back at it as we do now the financial crisis, will make a lot of sense. "

What does it all mean?

Markets will look through the gloom to the future so when it feels at it's worse, they will be looking six months to a year ahead and recovery start. The key is to ensure funds you want invested can take advantage of the recovery as when this starts it will be quick and when the most gains be made. The funds held on deposit are now worth reviewing for much better rates with Easy Access Accounts paying up to 1.90%, 1 Year Fixed Rate up to 3.30% and 2 year at 4.30%. Ironically, it is similar rates for 3 and 4 years with the rate actually falling for 5 years. (Source: moneyfacts). This indicates our expectancy that interest rates will rise in the relative short term to buy breathing space and flexibility for the Bank of England to then start reducing them.

Good News

Some businesses are taking climate change very seriously and the founder of Patagonia, Yvon Chouinard, has taken it to the ultimate level by giving away the entire company to a trust that will use future profits to fight the climate crisis. "Earth is now our only shareholder. Instead of extracting value from nature and transforming it into wealth for investors, we'll use the wealth Patagonia creates to protect the source of all wealth." The Guardian

We mourned the passing of Queen Elizabeth II and have admired the fortitude, duty and decorum show by our new King Charles III. We wish him well in helping keep our Country united in such difficult times.