This article is by Justin Rourke – Head of Advice at Armstrong Watson Financial Planning & Wealth Management and Richard Cole, Fund Manager at Future Money Ltd. We aim to provide you with our commentary on the latest economic and investment developments which are likely to be affecting your investment and pension portfolios.
We also provide regular webinars called “Making Sense of Markets” where they discuss the factors affecting economies and markets. The last webinar was on the 2nd February. Please click here to watch the recording.
In this latest market update we discuss the falls in inflation, and the prospect of interest rates to come down and how central bankers are embracing optimism.
The Causes of Inflation
Since the beginning of 2022 investment markets have been primarily focused on inflation levels and what this means for the path of interest rates. Although unconnected, the major news stories of this time have all had similar economic consequences. Covid related supply chain issues, Russia’s invasion of Ukraine, Liz Truss and Kwasi Kwarteng’s failed ‘mini-budget’, and overly tight labour markets have all led to higher inflation and/or higher interest rates.
The Path of Markets
For investment markets, the reaction to these developments can be split into three broad stages:
January 2022 until mid-October 2022: Characterised by heavy losses across equities and bonds as the scale of the inflationary problem became apparent.
Mid-October 2022 to late-October 2023: Markets were broadly flat. While inflation had peaked and on a downward trajectory it was still well above target, leading central bankers to continue increasing interest rates.
Late-October 2023 to date: Markets have been positive as inflation approaches target levels, and central banks suggest interest rate cuts will soon be justified.
Expected Timing of Interest Rate Cuts
This most recent period, which has been rewarding for investors, remains a volatile time. Investors became overly exuberant in November and December due to lower inflation data and encouraging messages from central banks. Markets rallied strongly as investors priced in a 80% probability of a first interest rate cut for the US in March 2024, while anticipating there to be six 0.25% cuts by the end of 2024. Since that point, investors have tempered their expectations significantly, which meant markets fell in January, and the average outlook is now for the first US cut to come in June, with two further cuts by the end of the year. Similar expectations are in place for the UK.
Expectations Can and Do Change
As illustrated by the swings described above, opinions can shift significantly due to economic readings and central bank comments. As such, there is no guarantee that June will be the date of the first rate cut or that there will be exactly three cuts this year (and a delay into later summer for the first cut would not be surprising), but that is where current expectations lie.
Encouraging Data
Data in March from the Office for National Statistics increased investor confidence regarding rate cut timing. UK headline inflation rate, CPI, fell to 3.4% from last month’s 4%, while core CPI, which is a more effective measure of domestically generated inflation, fell from 5.1% to 4.5%. Both figures were slightly below the expected levels. Earlier that month there was also encouraging data in the labour market, with wage growth falling slightly, further indicating greater slack in the UK economy, which is a prerequisite for lower interest rates.
Interest Rate Decisions
Following these data releases, the Bank of England held interest rates steady and its governor, Andrew Bailey, said he is more confident that inflation is heading in the right direction and that higher interest rates have worked effectively in this regard. While he did not give a date for the timing of a rate cut, importantly he did not push back on current market expectations. Jerome Powell, the US Federal Reserve Chair, has also expressed a ‘dovish’ outlook in recent weeks.
An Accommodative Pivot
Markets have welcomed the pivot toward an accommodative stance, which is important because recent signs of improvement in economic growth might otherwise have alarmed investors, leading them to believe that rates would remain elevated for an extended period (this would be a case where positive economic news could be detrimental to investment markets due to tighter monetary policy). However, neither Bailey nor Powell, along with several other central bankers, chose to dampen enthusiasm during this time.
Inflation Receding, Prospects Improving
Markets are improving as inflation recedes, interest rate expectations fall and economies strengthen. Political risk remains an evident factor that could temper confidence later in the year, but for now central bankers are expressing optimism about our prospects and investors are benefitting from this improving position.
Our Philosophy
Volatility is a part of investing which is why we always take time to understand how much risk any client is prepared to take before investing. We also generally believe in the benefit of diversification of assets to help manage some of the extremes of the markets. Taking a diversified multi-asset approach means that some assets can fair better in different market conditions as they are more defensive assets such as bonds, whereas during periods of growth equities tend to fair better.
Armstrong Watson, in addition to our full range of accountancy services, also have our own fund management expertise from the Future Money asset management team, as well as independent expertise from the wider market. We are able to use this to help provide insight, commentary, advice and support to our financial planning and wealth management clients.
A key aspect of our investment philosophy is that it is time in the market not timing the market, which is usually the best approach. For more information and guidance on Investing, please download our useful Guide to Investing here.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind. We believe that for those people who are considering taking financial advice in relation to their savings and investments it may be a good time to do so to utilise existing allowances and tax reliefs due to the fact that certain allowances are frozen to 2025/26.
Important Information
Please note that the contents are based on the author’s opinion and are not intended as investment advice. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested.
If you would like to discuss your investment portfolio please speak with one of our Financial Planning Consultants on 0808 144 5575 or email us.
