Commentary on September 2022
Market Overview & Performance Update
It was hoped that the election of a new Prime Minister would restore a sense of calm and statesmanship to British politics after the antics of the previous occupant of number 10. However, in the short-term things have not exactly gone to plan and the mayhem of the past week has left most people scratching their heads in disbelief. In our latest update we attempt to explain events that have roiled the markets.
It is generally the case that once a development in financial markets has hit the headlines most of it is over, at least in the short term. In this case, calm has been restored by the BoE being forced to act as the grown up and intervene to reassure markets, leaving politicians to squabble and attempt to apportion blame for their mess.
Hidden behind new Chancellor Kwasi Kwarteng’s misleadingly named “mini’ Budget is a bold plan to spur growth and productivity through slashing taxes and regulations in energy, infrastructure, housing, agriculture and childcare. It marks a step towards traditional Conservative smaller state ideology, with promises of more moves in this direction to come. Markets will have to adjust to a new political policy environment under “Trussonomics’.
However, major policy changes require clear execution and, in this case, announcing a tax cutting bonanza without any credible funding plan, was seen by markets as both arrogant and naïve and punished accordingly. A period of extreme volatility ensued as yields on 30-year gilts soared from 3.5% to 5% and the value of the pound plunged from 1.12 to 1.03 against the dollar before the Bank of England was able to restore stability. At the time of writing, the pound has more than recouped its losses and gilt yields have recovered strongly back to 3.7%. Calm has been restored for now but going forward the Government needs to come up with a clear plan for funding these tax cuts to restore its credibility.
So Where Does This Leave Markets?
In the short term we would not be surprised to see some further turbulence while the trend to increase interest rates continues to play out. 2022 has been a particularly difficult year in this respect as markets are being forced to navigate a path back to normalisation after years of exceptionally easy monetary policy. The good news is that with bond yields approaching 4% much of this process has likely played out. Inflation is at, or is close to, a peak across developed economies and, according to JP Morgan, is set to drop below 4% from over 10% over the coming year, which should allow an eventual easing of policy and a better environment in 2023.
In what has been a challenging year, we are pleased to share that all our standard portfolios have outperformed their respective benchmarks for the year to date. Whilst portfolio values have fallen, they have declined by considerably less than their corresponding benchmarks and in doing so have achieved first quartile performance. Our focus on capital preservation has cushioned our exposure to market falls.
Whilst these setbacks can be unsettling history has shown us despite the peaks and troughs markets trend upwards over time. Since 2012 we have witnessed the Taper Tantrum of 2013, the shock of the 2016 Brexit Referendum and its political ramifications, an over-enthusiastic rate-hiking policy by the US Federal Reserve in 2018, the pandemic catastrophe of 2020/1 and the invasion of Ukraine along with a huge spike in inflation and interest rates in 2022. During these challenging times, as an example, our hugely popular low-medium risk income portfolio has gained 78%, achieving first quartile performance and outperforming its benchmark by a whopping 28% (31/12/11-30/09/22).