Investment Update

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Article written by Iain Lightfoot, Managing Director, Armstrong Watson Financial Planning and Wealth Management and Richard Cole, Fund Manager at Future Money Ltd. Building further on these articles Iain and Richard have also recently recorded a series of informative Webinars the latest of which is available to view here.

Interest Rates On the Rise – Just Not Quite Yet

The Case for Rising Rates

Interest rates are headline news currently and together with inflation, have dominated talk in investment markets for much of this year.  The latest inflation numbers were released on Wednesday 17th November and showed UK CPI at 4.2%, which came in above consensus forecast levels and well above the Bank of England’s 2% target.  What’s more, inflation is expected to continue rising over the coming months with the Bank of England predicting a peak of around 5% in April next year.  The UK isn’t the only region with above target price rises either, with Europe and the US also subject to higher costs.  In such an environment and given that interest rates are still at rock bottom levels (0.1% in the UK), central bank action to raise rates would seem likely, although this have not yet been forthcoming.  The US Federal Reserve has so far looked to wind down Quantitative Easing bond purchases before adjusting interest rates, while the Bank of England has taken no action as yet, with the conclusion of their most recent Monetary Policy Committee (MPC) meeting on 4th November being to not hike rates.

Buying Time

The decision of the Bank not to move was a surprise to markets as the Governor, Andrew Bailey, along with other senior members had seemingly talked up the prospect of imminent action.  Nonetheless, the decision that rate hikes were not yet justified does not mean that the Bank of England is unphased by the recent surge in inflation.  What it does mean is that the Bank is acting cautiously, fearful that moving too soon could prove to be a costly mistake.  Inflation is high at the moment and unemployment is low.  Yet, a large factor in the higher inflation is supply chain disruption which is linked to Covid and can be seen in many sectors of the economy.  Also, at the time of the decision, the latest unemployment numbers did not account for the period after the final removal of furlough.  As such, the bank didn’t want to move early in case inflation fell of its own accord as supply-side issues were ironed out or that unemployment were to pick up.

Stay Tuned

This is not our central view, however, and nor does it appear to be the Bank’s.  Andrew Bailey stated that while interest rates would be held for now, it was a very close call and that interest rates would likely be raised in the coming months.  This view has been supported in the two weeks since the interest rate decision, with the further increase in inflation discussed above and also with strong employment numbers coming out on 16th November, suggesting that the removal of furlough has not created a wave of job losses. With the next MPC meetings in December and then February, an interest rate rise at either is now expected.  Furthermore while inflation is likely to come down partially around the middle of 2022, in the absence of a further economic shock before then it seems likely that interest rates will rise further as next year progresses.

And Yet…

The caveat in the previous sentence should not be ignored, however. While investment markets continue in the belief that Covid is now controllable, economic implications are still a feature.  Austria has just announced a new lockdown and other parts of Europe may follow suit.  This has dented confidence in the short term and could prove to be a factor in central banks shying away from rate hikes after all. 

Slow and Steady

The Bank of England, along with its counterparts in Europe and the US are keen to raise interest rates and to unwind Quantitative Easing programmes when conditions allow, so that they have the necessary firepower to use whenever the next crisis occurs.  Yet, on the path towards this destination, much caution will be used.  While tightening monetary policy conditions through higher interest rates and reduced Quantitative Easing will give central banks the ability to ease conditions when needed, if they act too quickly to get there, they are in danger of choking off economic growth and so creating the crisis they would need to react to.  Therefore, we expect that central banks will raise interest rates over the coming months, albeit cautiously. Movements will likely be gradual and small when compared to pre-Global Financial Crisis levels, but compared to the rates we have become used to since 2009, an increase can nonetheless be expected. 

Our Philosophy

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 to utilise existing allowances and tax reliefs. 

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.

For more information and guidance on Investing, please download our useful Guide to Investing here.

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.

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