Please find below our latest investment market commentary, which on this occasion focuses on Wednesday’s Budget statement. We continue to provide regular updates and further investment updates and observations to help support our clients.
Article written by Iain Lightfoot, Managing Director, Armstrong Watson Financial Planning and Wealth Management and Richard Cole, Fund Manager at Future Money Ltd.
In the eyes of stock markets, the pandemic is yesterday’s news. Thanks to huge stimulus packages delivered by central banks and governments and with the progress made on the vaccination front, markets have now mostly recouped the losses of February and March last year and in many cases all-time highs are now being achieved. This of course raises the question of complacency, as there is still the possibility of a vaccine beating virus strain to emerge, but with an achievable route past the virus now clear and with an economic recovery emerging, markets are buoyant.
Rarely over the past decade have there been times in which a major geopolitical or macroeconomic event has not dominated the news agenda. Fear over a double-dip recession following the global financial crisis, the Eurozone debt crisis, Scottish independence referendum, Brexit, US-China trade war, US Presidential Elections. While Covid-19 is clearly still with us, in terms of market focus, things are moving on and for once we appear to be in a relative state of calm. This will no doubt not last, with potential disruptive events in addition to new virus strains including the possibility of IndyRef2, the question of how to confront an increasingly assertive China, and important elections approaching in both Germany and France. Yet, until one such major event assumes centre stage, investors’ attention is likely to be focused on more traditional economic matters.
Currently under consideration is the prospects for inflation and for interest rates in the US. Joe Biden won the US presidency in part due to his unassuming personality. After four years of the outlandish behaviour of Donald Trump, a return to both multilateralism and incrementalism was both expected and desired. While the former looks to be emerging, with Biden seeking a collaborative approach in handling China, as well as in proposing global corporate tax cooperation, on the latter a more adventurous approach, at least in economic matters, is being pursued.
The US economy is already recovering well from the pandemic, yet Biden wants to bolster this. His recently approved $1.9tn economic stimulus bill will do the job. He is not done there, though. In addition, plans are being drawn for an infrastructure and education programmes likely to be worth $3tn. While there is no guarantee such plans will successfully pass the finely balanced Senate, it shows the huge scale of the President’s aspirations.
Markets therefore, are paying attention. With a surge in demand expected post Covid as both consumers and corporations have been amassing savings, and with potential supply bottlenecks as supply chains have become disrupted, higher inflation is now expected.
The Federal Reserve has said they will not raise interest rates until 2024 at the earliest. Markets are increasingly questioning whether a move will come sooner, but for now the Fed is sticking with its dovish agenda.
This is an approach which is likely to be echoed across the developed world over the coming years. While the high inflation of the 1970s ushered in a central bank focus of moderating inflation above all else, such consensus is now changing. With many countries struggling to create dynamism in their economy over the past decade, the efforts of central banks are increasingly turning to supporting growth, through tolerating higher inflation levels before the brakes are applied.
Such a policy has two likely aims, one more openly admitted than the other. Low interest rates support employment and economic growth – nothing too questionable here. Second though, in a time of ballooning public borrowing and little appetite for austerity, a higher inflation rate will have the helpful side-effect of gradually eroding the national debt. While central bank independence is still largely intact, where this premise is fading, few central bankers will face political pressure for letting inflation run slightly hot.
Returning our attention from such intrigues, if we are in for a period of higher inflation then this will have important implications for markets. In fact, this is something that has already been occurring over recent months. Fixed income markets, and especially government bonds have seen significant falls of late, while within equity markets there has been a rotation from the pandemic beneficiaries to those more cyclically attuned.
Such trends could quickly change should a backwards step in the pandemic recovery occur, or should a new geopolitical challenge arise, but in their absence and with the economic picture looking favourable, the story of higher inflation and its impact on markets looks set to occupy attention for the time being.
Our philosophy is that no one can predict the peaks and troughs of financial markets with any accuracy and it has always been extraordinarily difficult to time when the best (peaks) and worst (troughs) are. Timing the stock market is extremely difficult, so we believe it is best avoided. 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 access to 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.
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 now may be a good time to do so, as following the most recent Budget statement in March key and important allowances and reliefs, including in respect of pension planning in particular, remain available.
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
For more information and guidance on Investing, please download our handy guide to Investing here.