Investment market update - October 2022

The tax cuts announced by the Chancellor have sparked concerns about inflation, government debt levels and the path for interest rates in the UK. This comes at a time when investor sentiment is already affected by higher inflation, rising interest rates and slowing growth.

After a year in which equities and bonds have faltered, the last week has seen an increase in the volatility of the Pound and UK government bonds.

Markets were already stressed before the Chancellor’s ‘fiscal event’:

Investment market update - October 2022 graphic 3

It is at times like this that we remind investors that maintaining a long-term focus and a dispassionate attitude to events can serve us better than being caught up in the latest headlines however hard that may be. By remaining detached we maintain sight of the nuances of the market at the time and the opportunities that present themselves.

While the new Government’s mini-budget has dominated news flow here in the UK, investment markets’ key driving force, and the cause of falls in asset values this year, continues to be the tightening of monetary policy around the world, primarily from rising interest rates. The market reaction to Mr Kwarteng’s budget reminds us that central banks are ever mindful of the need to balance concerns about inflation with the possibility of slowing the economy too abruptly. In a world where the market has convinced itself that central bank liquidity can only reduce, the Bank of England took steps last Monday to restore liquidity to parts of the gilt market. This is a reminder that central banks are committed to orderly markets and can step in where they see signs of stress and dislocation, and in such circumstances asset prices can rebound as fast as they fell.

In short, there is a point at which central banks will stop raising interest rates, and it is at this point when markets will find a firmer footing on which to value financial assets. Knowing when this point will arrive and what the ‘terminal’ rate for interest rates will be is impossible to know, but what is clear is that if this point proves to be earlier than markets currently expect there will likely be a positive reaction for both equities and bonds.

Markets are concentrated on the point at which growth fears outweigh inflation fears:

Investment market update - October 2022 graphic 4

We should also bear in mind the makeup of our portfolios. Mazars portfolios are well diversified across different asset classes, geographies and currencies. When the Sterling falls this is a positive for assets in our portfolios that are denominated in foreign currency. At our June Investment Committee, we took the step to increase foreign currency exposure even further given the economic uncertainty facing the UK. This has benefitted our performance and we are now in the position where we can even consider adding back Sterling assets into portfolios at an attractive rate.

Perhaps the most important part of having a long-term investor mentality is understanding that we do not seek to avoid volatility, but rather we can be rewarded for enduring it. Whether markets are moving up or down there are opportunities to be had which can lead to profit taking further down the line, but if we are not invested then we are not able to take advantage of those opportunities. Ultimately markets will reward patience, and though it is tempting to think that one can try to time high and low points in equities markets, the fact is that turning points arrive quickly and often from unexpected sources. Until this point, we will continue to manage portfolios prudently. Over the last year, we have protected from the worst of market volatility, by reducing our exposure to equities, through our overweight to the US Dollar, and by limiting the impact of interest rate rises on our bond holdings.

As always, if you would like to discuss your investment portfolio in more detail, please do not hesitate to contact me or your usual financial planner.

Yours sincerely,

David Baker

Partner, Chief Investment Officer

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