Please find below our latest investment market commentary. 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 August 2020 the US Federal Reserve changed its mandate in order to target an inflation rate which on average is 2%, rather than a precise 2% target. In effect this meant that the central bank could wait longer as inflation rises before raising interest rates and therefore allow the economy to grow further before the brakes are applied. This change in policy was in reaction to the difficulties experienced in generating consistent economic growth following the Global Financial Crisis and was also a reflection of the huge challenge facing the economy in the recovery from Covid disruption. In bond markets this had the impact of suppressing short to medium term interest rates, while increasing longer term yields. The expectation here being that by delaying rate rises now, larger rate rises will be required down the line.
This was a large shift in policy for the Fed and as with many factors in the world of finance, where the US goes, the rest of the Western world tends to follow. In this vein, the European Central Bank has just announced a similar shift in policy. The prior policy was to target inflation at close to, but below 2%, whereas the new policy is to target 2%, but with a tolerance for readings to temporarily exceed this level before action is required. This change in policy will have little impact immediately, but over time it could be seen as a significant change. Historically, the ECB has been quick to react to rising inflation, with heavy influence from Germany and their destructive experience of interwar hyperinflation. Now though there appears to a be a new era, where excessively low inflation, and the numbing effect it has on economic growth, is viewed as an equal threat to occurrences of overly high inflation. Long term, this could result in a more dynamic economy, but also perhaps one which is more prone to cyclicality.
Last week it was announced an agreement has been reached by 130 countries, including all G20 members, on big changes to the global tax system. This aims to end the ‘race to the bottom’ on corporation tax rates while also allowing for the greater taxation of the largest companies’ profits in jurisdictions where the sales take place, rather than where a company’s offices are based. Many of the details are yet to be ironed out, and the deal could yet be scuppered by national parliaments, but this is a large step forward in a process that will allow greater tax revenues to be generated, which is especially desirable at a time when countries face huge debts resulting from the pandemic. Should this agreement make it to full implementation then clearly the companies targeted will be the losers, but with many countries having previously taken steps towards unilateral action in this area, a global accord has largely been welcomed by the leading companies as this will bring consistency and simplicity to the process. Market reactions were largely welcoming to the development as well, with the acceptance that the reductions in profits will be manageable and with a targeted launch date of 2023, there will be time to adjust.
A miserable mood has taken hold of investment markets in recent days with both longer term bond yields and equities falling, representing an increasingly pessimistic view for the global economy. Concern over the spread of the delta variant appears one cause, while questions of a slowdown in China are being raised. Yet, both factors have been apparent for some time and therefore such a rapid shift in psyche appears more likely to be a shorter period of volatility, at this stage. Nonetheless, while markets often overreact, new trends can gain traction quickly and so this is a topic that should be monitored closely.
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 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.
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 back in March key and important allowances and reliefs, including in respect of both investment and pension planning, 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.
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