As we reflect over the last 18 months, we can certainly say that 2022, in particular, has proved to be a challenging time for investment markets. Market events are rather like number 22 buses, you don’t see one for ages and then three come along at once.
In terms of adverse market news, 2022 brought:
- The Ukraine War.
- Spiralling inflation with rapid interest rate rises. And to cap it all…..
- A Bond market shock caused by the Truss/Kwarteng mini-Budget in the Autumn forced the Bank of England to step in and support the markets.
Bouncing back from the effects of Brexit and Covid 19, we then arrive in 2022, where we saw things take a further turn for the worse in global economic terms, caused firstly by the growing energy crisis, which was then exacerbated by Russia’s invasion of the Ukraine in February 2022 which sent inflation rocketing.
During the summer, there was a deterioration in inflation expectations; we initially hoped that inflation would peak in 2022, but mounting evidence showed that inflation looked likely to stay higher for longer than first expected, as indeed has proven to be the case.
The inflation ‘medicine’
As a result, central banks have had to take increasingly aggressive measures by way of increasing interest rates in an attempt to get inflation ‘choked’.
Looking back to the beginning of February 2022, the Bank of England’s base rate was still 0.25%. As of 1st May 2023, it stands at 4.25%, a rise of 4% in just over a year.
It is possible we could see yet further rate rises into 2023, however, now there is increasing evidence of inflation abating, any interest rate ‘medicine’ ought to be in very small doses going forward, and indeed rates may well peak this year if they haven’t already.
Typically, bonds (essentially a type of fixed-interest investment) are viewed as relatively safe and act as a counterweight against stock market volatility. However, we have seen bond values fall as their capital values have been affected by the necessary medicine of interest rate rises.
As a general guide, most portfolios hold a combination of stocks and bonds, but neither asset class has been immune from market sentiment in recent months.
The Bank of England believes its medicine is working and that inflation – which has been pretty stubborn until this point – will start to fall fairly swiftly from the middle of 2023.
We believe that markets have already priced in for a period of interest rates at the 4 to 4.5% range they already reached. The situation and outlook in the US are similar, although they are a little further down the rate-hiking track, and inflation is already falling faster there than in the UK.
It is anticipated these rate rises are already “baked in” to the value of equity and bond markets, and therefore, unless there is much further bad news in the near future, we can hope that we have seen the worst.
Therefore, our guidance would be to hold on and tough it out in the belief that the Bank of England (and the Federal Reserve in the US) get it right and that we see more lasting evidence of inflation being brought under control.
The Bank’s target is for inflation to be back at around 2% by late 2024 and, consequently, for interest rates, once they peak, to level off and start to fall back to more normal levels.
Once the markets have confidence that inflation is under control, we would expect to see a recovery in both equity and – especially – bond markets which would, of course, have a positive rebounding effect on portfolios. To a degree, we are seeing evidence of this already with the FTSE-100, which has touched all-time highs this year; it is hoped that the bond recovery duly follows and that 2023 and 2024 (the years of the hoped-for falling inflation) prove to be good ones for that sector.
As always, do contact your adviser if you have any concerns, or wish to discuss your portfolio and investments on a one-one basis.