Please find below our interim Investment Market Update as at 6th August 2021.
Blue Sky Investment Market Update
We told you so!
A few weeks ago, we stated that we expected inflation to rise to about 4% and it appears that the Bank of England’s (BoE) new forecast suggest that this may indeed happen towards the end of the year. Previously, the BoE had forecast 2.5%. As reported by Ft.com, the BoE suggests that there will likely be excess demand for much of next year. Even today, it was announced that energy bills will rise significantly adding more weight to the inflationary expectations.
Energy bills will increase to levels not seen for nearly a decade, after a surge in wholesale gas prices, raising concerns over how financially stretched families will manage over the winter. Energy regulator Ofgem said prices for 11 million households, whose bills are dictated by the main price cap that came into force in 2019, would increase by £139 to £1,277 – nearing a previous peak of £1,286 in 2013.
Interest rates to rise
The thought had been that inflation would overshoot and then come back down, but the latest forecast suggests this may be sticky and inflation may be elevated throughout 2022. This has led the BoE to comment that “some modest tightening of monetary policy is likely to be necessary over the next two years to keep inflation under control”. The majority of the eight members of the Monetary Policy Committee (MPC) indicated that they thought the economic conditions had been met to allow it to start discussing raising rates again.
Andrew Bailey, BoE Governor, said he thought the economic recovery from coronavirus would be “bumpy” and the period of high inflation would be “temporary”, but it was right to change the committee’s guidance because “the MPC takes the risk of persistently higher inflation very seriously”.
What does this mean?
Even a small rise in interest rates will no doubt temper some enthusiasm for the housing market as psychologically, borrowers will be thinking that there will be more rises to follow. With most new mortgages being on a repayment basis, a couple of rate rises will test the ability of borrowers to service their loans.
The move also begs the question as to how the investment markets will respond. So far, they seem to have taken it in their stride. It’s not the likely rate increase which is the worry, more whether further rate rises will be necessary if inflation remains elevated for too long. Of course, higher interest rates feed through to companies who then must service higher debt repayments which can in turn, impact profitability.
With this announcement, it now looks like the BoE will normalise monetary policy faster than the European Central Bank and US Federal Reserve (Fed). On Wednesday the Fed also provided some forward guidance for the scaling back of the Fed’s $120 billion asset purchase programme and suggested an interest rise in 2023.
This move reinforces our pending switch
We still like the UK for our portfolios, but in the last two weeks the Blue Sky Investment Committee has agreed to increase our allocation towards Europe for both our Momentum and Target portfolios, 50% being orientated towards Sustainable companies in Europe.
Our Target portfolio is all UK orientated and with this latest news, it seems to make even more sense to reduce the UK exposure by 25%. In our Momentum portfolio, we will add circa 20% into Europe but this time we are removing our US smaller company holding which on a risk/reward basis has begun to weaken.
A rallying cry to create a big bang
Boris Johnson has issued a rallying cry for institutional investors to commit more money into British companies and create a ‘big bang’ to power an economic recovery. As reported in Bloomberg, in a joint letter with Chancellor Rishi Sunak, the PM called for “hundreds of billions of pounds” to be unleashed into longer term assets, including pioneering firms and infrastructure. “This would help secure better retirement for pensioners and support an innovative, greener future” he said.
Johnson and Sunak said UK investors are missing out on the returns from opportunities, leaving their international peers to reap the rewards. The PM flagged opportunities offered by the UK Infrastructure Bank and the forthcoming green bond plan.
Experts still expect equities to deliver
Ft.com reported this week that Goldman Sachs believe Wall Street’s climb has further to go this year. It estimates that the S&P 500 could gain a further 7% by the end of the year. This is fuelled by bullish earnings and an estimate that company earnings per share would grow by 45% throughout this period.
Goldman Sachs stated, “we expect stronger revenue growth and more pre-tax profit margin expansion as firms successfully manage costs and high margin tech companies become a larger share of the index”.
In our Momentum portfolio we have remained holding our existing tech exposure in the US, albeit in a diversified way.
Short and sweet this week. Lots of noise as usual, but our portfolios are marching on.
Have a lovely 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.