Please find below our Investment Market Update as at 14th October 2022.
Every reporter seems to be turning into Robert Peston and more!
My, how these reporters are enjoying this crisis! With every twist and turn they seem to be getting more and more excited… it’s as if they are auditioning at Rada!
Robert Peston is getting left behind as the ‘new breed’ have become more animated, demonstrative and dramatic. Talking more and more quickly to boot. No wonder many of our clients are switching off and going to bed early of an evening. Every dramatic comment or gesture feels like a punch in the nose doesn’t it!
In some ways you can’t blame the reporters, they can only feed off the scraps they are given. This time however they have been given a banquet!
An about turn?
Investment markets and the pound bounced yesterday on the hope that the government would reverse much of the mini budget. Liz Truss’s government came under increasing pressure from their own party, the International Monetary Fund (IMF) and the Bank of England (BoE) to reverse the unfunded tax cuts which have shaken markets.
Truss commented that she would not be delivering spending cuts to fund some of the tax friendly mini budget strategies. In the last 24 hours, the rhetoric seems to have softened. Kwasi Kwarteng yesterday left IMF meetings, so he could return to London. Reports suggest that the government is preparing to reverse much of their recent mini budget. It very much feels like the Chancellor has been summoned to the Headteacher. IMF head, Kristalina Georgieva, has welcomed the idea of a reversal. Read into that what you want!
You are on your own jack!
Investment markets went into a spin again midweek as the Governor of the BoE, Andrew Bailey, stated that their bond buying programme would not be extended beyond this Friday. This gave Pension Trustees just three days to sell whatever assets they needed in order to restore their cash buffer. However, the day after, the central bank purchased £4.4 billion of bonds. This reassured markets, along with the signs that pension funds were taking the opportunity to sell gilts and other assets to raise cash.
The BoE then bought £4.7 billion of gilts on Thursday, including of £3.1 billion of index-linked bonds. This led to yields falling and underlying values improving. Despite Wednesday’s declines, 30-year bond yields remain well above the level of around 3.8% seen before the “mini” budget triggered acute volatility in the gilt market and with Sterling.
Good news or bad news?
US stocks staged a big reversal this week following the latest inflation data from the US. Markets were hoping for signs of slowing inflation but instead, month on month inflation rose by 0.4%, double market expectations.
The news led the S&P 500 down by 2.4% before it recovered all its losses and surged as much as 2%. The S&P 500 hit 3,500 briefly. Interestingly, as reported in Bloomberg, the 3,500 level represents a 50% retracement on the March 2020 low at circa 2,200 and the January high of 4,800.
In last week’s Commentary I highlighted that a big intraday swing in prices is likely to signal the end of the ‘bear’ market but sadly, this wasn’t of the magnitude required.
So, what was the reason for the turnaround? As I have alluded to previously, the more aggressive inflation, the more aggressive interest rate rises will be, the quicker we bring this uncertainty to an end, as painful as it will be in the short-term. The US futures markets are now expecting an increase in interest rates in the US of 0.75% for both November and December.
The thought process was that if monetary policy is too tight, it will cause more of a downturn which ultimately means looser monetary policy down the line. It will come for sure, but not just yet.
What does Jamie think?
Jamie Dimon, the well renowned CEO of JPMorgan, has a reputation for cutting through the noise and making his views clear. At an industry conference on Thursday, he was to the point, and very supportive of the Chair of the Federal Reserve (the Fed).
Basically, as reported by Bloomberg, his view is that a ‘soft landing’ for the US economy is unlikely. He believes interest rates will rise by more than estimates.
He now doesn’t believe that the Fed can cool a red-hot economy without bringing on a recession.
“I don’t know if it could be a soft landing – I don’t think so, but it might. If it is a hard landing, you could expect stocks to fall another 20-30%!!”
He went onto say, he expects US and global recessions by the middle of next year, citing drivers such as rising interest rates, persistent inflation and Russia’s continued conflict with Ukraine.
Reassuringly, Mr Dimon said he had total faith and trust in the Chair of the Fed, Jerome Powell, believing that ‘stagflation’ is worse than all of the other potential outcomes.
Stagflation: the simultaneous appearance in an economy of slow growth, high unemployment and rising prices.
Our move into significant cash holdings back in late July/early August now looks like a very smart move. Our aim, of course, is to buy back in at prices which are attractive, at a time when all the bad news is baked into prices.
Clouding the benefits of moving into cash has been the significant falls for infrastructure funds in some of our portfolios. Up until the last 2/3 weeks infrastructure was one of the best performing asset classes in what has been a very difficult year for both bonds and equities. We have been pleased with our positioning of this alternative asset class but announcements around the energy cap, the mini budget and the subsequent squeeze on liquidity for the Trustees of pension schemes has seen quite a dramatic fall in value.
We are likely to send out a switch notice to clients early next week which will lower our infrastructure holdings and move more money into cash, hopefully after we have seen a partial rebound in prices over the next few days. If Jamie Dimon is proved correct, this would prove a good tactical play. Of course, it’s also important to appreciate that these are just his views and matters can change very quickly.
When the news flow is at its worst, this is the ideal time to invest. The problem is that we won’t know this until after the event. Timing the bottom of the market is extremely difficult and therefore it is prudent to deploy cash periodically. Our view at Blue Sky is that this will likely be early next year.
When one looks back through history, every ‘bear’ market has been followed by a bull market. This means that every bear market is a brilliant opportunity, yet when you are in the midst of it, for most investors, it feels just terrible, and emotions are naturally heightened.
Financial Planning comes into its own
With all the turmoil going on in the world and across investment markets, it is so important to have a properly co-ordinated financial plan which provides reassurance that your future is secure, and you can continue to live life on your terms, with the confidence that you will never run out of money.
Over the past months, our financial planning models which incorporate various ‘what if’ scenarios have provided considerable reassurance at a time when news flow has deteriorated around the global financial landscape. This week I have personally seen five clients for their annual reviews and on every occasion, they have been relieved that their cash flow/financial modelling doesn’t look that different than on previous reviews, even after, in many cases, increased expenditure.
On average, the base case with these clients is that with their increased costs and depressed markets, their portfolios will have to deliver an extra 0.68% per annum to ensure they don’t run out of money. Most still need only need an expected return of below 3%. Remembering of course, that ultimately when markets turn, they normally deliver double digit returns very quickly. This will have the impact of bringing the required growth rate down again.
The longer money has been invested, then typically the less this crisis has impacted because we’re looking at long-term returns. New clients to Blue Sky will naturally feel the pain more. We must accept that investing is not an exact science and for the most part, investing is all about participating in the markets and benefitting from compound returns.
Compound returns: are achieved when the interest on a balance in a savings or investment account is reinvested, earning you more money. As a wise man once said “money makes money and the money that makes money, makes money”!
Basically, compound interest accelerates the growth of your savings and investments over time, despite the occasional bear market.
Earnings season kicks off in the US
Corporate earnings were deemed quite resilient in the last quarter, but this quarter may prove to be a different story. But, there could also be some pleasant surprises.
The major US banks kick off the earnings season today with JPMorgan, Citi, Wells Fargo and Morgan Stanley reporting. The focus will be less on last quarter earnings but more about their forecasts and what’s likely to come down the tracks. Bad debt provision will also be watched carefully.
A difficult time for virtually everyone at the moment. It won’t last, however I’m afraid it is likely to get worse before it gets better.
At some point, there is likely to be tremendous buying opportunities. It could be argued that if one invested cash into the markets now you wouldn’t go wrong, and I would agree over the medium to long-term. However, we feel that the optimum time for deploying cash may be early next year, but as this week and recent weeks have shown, everything is very fluid.
The more aggressive interest rate hikes are, the sooner these opportunities will present themselves – despite the pain in the meantime.
As always, we’ll keep you posted and react accordingly.
I’ll leave you with one final thought: it’s a good job we moved out of UK gilts a couple of years or so ago. These so-called ‘steady’ investments have fallen dramatically over the year. UK index linked gilts have fallen from 14th October 2021 to 13th October 2022 by 43.09% and traditional UK gilts by 28.36% (source FE analytics).
Keep the faith, and don’t watch too much news!
Gary and the Blue Sky Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.