Please find below our interim Investment Market Update as at 1st October 2021.
Blue Sky Investment Market Update
The UK economy grew faster than previously estimated according to the Office for National Statistics (ONS). This is, in the main, due to a stronger performance from health services and the arts than initially thought.
Gross Domestic Product (GDP) increased by 5.5% in the second quarter, significantly ahead of initial estimates of 4.8%. The economy is now 3.3% below its fourth quarter level in 2019, before the pandemic.
Good news at a time when we are having supply issues which hamper growth, something which many of us have had direct experience of at the petrol pumps in recent days.
Of course, this news is bittersweet and further increases the chances of the Bank of England (BoE) tightening their monetary policy, not least with a rise in interest rates. The BoE governor, Andrew Bailey, had already signalled the possibility of a rate hike by December with every member of the Monetary Policy Committee being ready to raise interest rates.
Inflation is their big worry and the issues with supply chains are forcing prices up. Add into the mix higher energy costs then you can see why they are primed. However, more recent data suggest that the recovery is stalling, and it is expected that with higher interest rates consumers are more likely to save than spend. I have spoken about the consumer boom coming to an end, but it is likely to be replaced by a business spending boom and an increase in government spending towards environmental and infrastructure programmes.
Property prices continue to rise
A report on ft.com yesterday alluded to continued property price rises. UK house prices rose at a double-digit pace for the fifth month in a row.
House prices rose by 10% compared to a year earlier according to September data from Nationwide. Of course, comparing data to last year and extrapolating is fraught with issues, and it will be interesting to see how property prices settle and whether they will weaken as many commentators are suggesting.
In London however, growth slowed significantly with an annual rate declining to 4.2% in the three months to September, down from 7.3% in the previous quarter.
In contrast, Wales was the strongest performer with house prices up 15.3% year on year, the highest rate of growth since 2004.
There is nothing like a deadline to boost activity and, of course, the stamp duty discount has played a huge part in these growth statistics, coupled with a re-assessment of individual lifestyles.
Data released by the BoE on Tuesday showed that the “effective” rate (the actual interest rate paid) on newly drawn mortgages dropped to 1.82% in August, a near record low.
The pound weakens
The UK fuel crisis has weakened the strength of the pound at a time when the anticipated rate rise should strengthen it!
Fears of poor growth and higher inflation have caused the pound to slip to its lowest point in eight months.
As reported on ft.com, the fuel shortage has just reinforced general supply chain issues. Even if the fuel crisis abates quickly, there are broader fears over the impact on the UK economy.
Investors have not gone out and bought Sterling which we would expect when a rate hike is signalled because the BoE response is due to inflation concerns rather than accelerating growth. Supply chain issues will bolster inflation in certain sectors whilst a slow-down in growth will create a drag on the economy.
Businesses are now less confident
According to the Institute of Directors survey, reported in Bloomberg today, confidence in the economy is now “falling off a cliff”.
Those running Small and Medium sized Enterprises (SMEs) were the least optimistic, that’s in contrast to a surge in confidence during the summer. Three-quarters of directors are bracing for higher costs in the next 12 months, little more than half predict higher revenues. Firms expecting to increase business investment are in a minority.
Investors shouldn’t just look through the UK lens
We have mentioned many times that most of our invested assets have a reach beyond UK shores. In principle, this should help our portfolios because when money is converted back into Sterling it should act in a supportive manner.
Of course, globally there are many issues and there is no doubt that the landscape is somewhat foggy at the moment. However, don’t be dragged down by the news flow. Think about the report for example from the ONS stating that the UK economy is now only 3.3% below its fourth quarter level in 2019… after all we’ve been through!
As you will be aware, we are less focused on geography than ever before. Whilst we do need to know what’s happening around the world, a significant amount of our focus is on thematic investments. Those assets which are going to benefit from huge structural changes.
For example, from the 12 May 2021 (when we last switched) to 30 September 2021, the FTSE 100 (price) has risen by 0.84% whilst our Global Themed portfolio has risen by 12.42% (exclusive of Blue Sky Charges). Of course, this can’t be a recommendation without understanding individual circumstances and the FTSE 100 shouldn’t be seen as a benchmark but as a common reference point.
It’s also worth pointing out that our Infrastructure 3 portfolio which combines global infrastructure and sustainable real estate has risen over the same period, and on the same basis, by 7.8%. Our Sustainable portfolios with LGT Vestra have also performed well with the balanced portfolio delivering 8.16%, once again over the same period.
Reasons to be cheerful for sure!
Next week is our Quarterly Investment Update, rather than a Weekly Update so as always will be a ‘meatier’ affair, so I’ll sign off now.
Enjoy the autumnal weekend.
Gary and the 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.