A bold plan, a poor execution, and a forced intervention
It was hoped that the election of a new Prime Minister would restore a sense of calm and statesmanship to British politics after the antics of the previous occupant of Number 10. In the short term, however, things did not exactly go to plan, and the mayhem of recent weeks left most people scratching their heads in disbelief. Hidden behind the misleadingly named "mini" Budget was a bold plan to spur growth and productivity through slashing taxes and regulations in energy, infrastructure, housing, agriculture and childcare, but the absence of any credible funding plan was seen by markets as both arrogant and naive, and was punished accordingly.
Gilt yields soar and sterling plunges before order is restored
A period of extreme volatility ensued as yields on 30-year gilts soared from 3.5% to 5% and the value of the pound plunged from 1.12 to 1.03 against the dollar. The Bank of England was ultimately forced to act as the grown-up and intervene to reassure markets, leaving politicians to squabble and attempt to apportion blame for their mess. At the time of writing, the pound had more than recouped its losses and gilt yields had recovered strongly back to 3.7%. Calm was restored for the time being, but going forward the Government would need to come up with a clear plan for funding these tax cuts to restore its credibility.
The broader announcement marks a step towards traditional Conservative smaller-state ideology, with promises of more moves in this direction to come. Markets will have to adjust to a new political policy environment under "Trussonomics". Major policy changes require clear execution, however, and announcing a tax-cutting bonanza without any credible funding plan was a misstep that financial markets were swift to punish.
Navigating the path back to normalisation
In the short term we would not be surprised to see some further turbulence while the trend to increase interest rates continues to play out. 2022 had been a particularly difficult year in this respect, as markets were forced to navigate a path back to normalisation after years of exceptionally easy monetary policy. The good news is that with bond yields approaching 4%, much of this process had likely played out. Inflation was at, or close to, a peak across developed economies and, according to JP Morgan, was set to drop below 4% from over 10% over the coming year, which should allow an eventual easing of policy and a better environment in 2023.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Markets have weathered worse, and recovered
Whilst these setbacks can be unsettling, history has shown us that, despite the peaks and troughs, markets trend upwards over time. Since 2012 we have witnessed the Taper Tantrum of 2013, the shock of the 2016 Brexit Referendum and its political ramifications, an over-enthusiastic rate-hiking policy by the US Federal Reserve in 2018, the pandemic catastrophe of 2020 and 2021, and the invasion of Ukraine along with a huge spike in inflation and interest rates in 2022.
During these challenging times, as an example, our low-medium risk income portfolio has gained 78%, achieving first quartile performance and outperforming its benchmark by 28% over the period from 31 December 2011 to 30 September 2022. It is generally the case that once a development in financial markets has hit the headlines, most of it is over, at least in the short term.
With bond yields approaching 4%, much of the painful normalisation process has likely played out.
In what had been a challenging year, we were pleased to share that all our standard portfolios outperformed their respective benchmarks for the year to date. Whilst portfolio values had fallen, they declined by considerably less than their corresponding benchmarks and in doing so achieved first quartile performance. Our focus on capital preservation cushioned exposure to market falls, and the combination of disciplined positioning and careful risk management continued to deliver for clients through a period of considerable uncertainty.
Our focus on capital preservation has cushioned exposure to market falls. All standard portfolios have outperformed their respective benchmarks for the year to date, achieving first quartile performance.
Capital preservation first
In a year where both equities and bonds have fallen, our emphasis on protecting capital has meant that portfolios have declined by considerably less than their corresponding benchmarks.
Inflation at or near its peak
Inflation is at, or close to, a peak across developed economies. According to JP Morgan, it is set to drop below 4% from over 10% over the coming year, which should allow an eventual easing of policy and a better environment in 2023.
Consistent long-term track record
Our low-medium risk income portfolio has gained 78% since 31 December 2011, achieving first quartile performance and outperforming its benchmark by 28%, demonstrating the value of staying invested through volatile periods.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
Make an enquiry →