Global equity markets are down over 20% this year and with the correlation we are seeing in global fixed interest holdings, especially UK-based, bonds have also seen sharp declines. This has had a particularly cruel impact on what are typically deemed as ‘cautious’ portfolios, which have a heavier weighting to fixed interest assets. Conversely, these fixed interest assets have seen a sharp spike in volatility which is usually expected in a more ‘adventurous’ approach. As a result, we have been steadily decreasing holdings in fixed interest assets to mitigate this volatility and bring them more in line with what investors would usually expect from a ‘cautious’ investment strategy.
The huge amount of stimulus pushed by central banks as a response to the pandemic is screeching to a halt with inflation now at levels not seen for 40 years. Interest rates are therefore having to rise significantly in an attempt to mitigate further inflation; this in turn is forcing economic growth to slow.
So far, profits of large corporations this year have held up well. However, the impact of inflation and increased interest rates remains unknown, with heavy speculation from both sides of the fence.
This is all happening whilst the UK government are arguing amongst themselves in respect of radical changes to policy and fiscal packages such as the unfunded tax cuts sending shockwaves across the economy, pushing the Bank of England to step in and buy government bonds to help stabilise the financial system and ease the burden on the economy. The political situation remains volatile and seems to be changing on a daily basis; none of which is helping the UK’s global financial credibility. Recent government U-turns have lessened the pressure on the Bank of England to push rates to previously expected highs, returning some stability to UK markets.
It’s not all doom and gloom, however. With the falls that we’ve seen this year, we’ve seen forecasted 10-year annualised market returns increase by around 2% per annum (in comparison to forecasts made earlier this year) as equities and bonds are now starting from a lower point. This presents itself as an opportunity over the medium term for any new investment into the market from cash or more ‘cautious’ approaches.
What We Recommend
While our stance continues to be ‘hold tight’, we are starting to challenge some clients to consider reducing holdings within the fixed interest elements of their portfolio, particularly UK bonds and gilts. There is potential value in utilising capital derived from reduced weightings in these areas in favour of equities for medium-term recovery potential (rarely do markets provide opportunity to purchase shares at a 30% ‘discount’, as we have witnessed). Although volatility in the short term remains a risk, those investors with timeframes of 5 years plus should see this as a buying opportunity.
We should expect volatility to continue when the UK government illustrates how they expect to fund their recent budget. Furthermore, central banks will almost certainly continue to increase rates, so should you have a mortgage deal that is ending we strongly recommend you contact the mortgage advisers at SN Financial who can help find the best solution for you and your circumstances.
Our advisers at SN Financial Services are available to discuss any queries that you may have and invite clients to get in touch.