This year has been extremely volatile across almost all markets and asset classes. It is many decades since markets have been as challenged as this. These are extremely uncomfortable and unnerving times for all investors. The reasons have been well documented. Unfortunately, the reasons continue and will continue for some time yet. These reasons will resolve, but when is the huge unknown. We need to see inflation peaking and declining, interest rates peaking, corporate earnings delivering growth. We need to understand what the expected recessions around the globe mean. Short? Deep? Or shallow? We need confidence and certainty in markets. At present it is fear and uncertainty that rules as the economic backdrop is very gloomy. Though, perhaps not quite as gloomy as markets are reporting, which would not be unusual. Volatility equals low visibility, which is painful for investors.
Safe havens really don’t exist other than perhaps the dollar which is very strong. Strong against all major currencies. Again, its strength will diminish once some clarity on the global economy appears. Fixed income, a normal safe haven, has been battered by interest rates and central bank tightening. Sovereign bonds, index linked gilts all are suffering although that tide might be turning.
As we have all witnessed, the new political leadership in the UK caused very serious problems with sterling and Gilts, the instruments the Government use to raise money, by their handling of the mini budget or fiscal event as they called it. Markets viewed the fiscal position unsustainable and gilt yields shot up. It is very well explained in this short video.
This meant that the rate government could borrow increased almost instantly, which in turn suggested that base interest rate would now need to rise to cope with the turmoil to around 6%. This has resulted in banks repricing mortgage products and will see new or variable mortgages increase substantially, defeating the help that had been intended to cushion the dramatic increase in energy costs that we are all enduring. It is likely that the government action will prolong inflation and may also have deeper ramifications for the housing market.
There was significant confusion during this period of turmoil when it was reported that some pension funds were on the brink. This was not referring to individual SIPPs but principally defined benefit corporate pension funds. It is quite a complicated area but well explained in this article.
Whilst we are long term investors it impossible to ignore the short-term turmoil. We remain confident that the fund managers that we support will deliver their long-term objectives for our clients. In the short term, it is impossible to avoid the volatility and its ramifications. Our view remains to stay invested and allow the clarity to appear which will be grasped by the fund managers. It would be misleading to suggest that it will all be resolved very soon. That is much too optimistic. However, it will get resolved and the clarity will appear, and opportunities will become evident. It may be a different view that we need to adapt to but it much too early to tell.