After a week which has seen a change of Prime Minister (again), we can hopefully now look forward to some stability and less sensationalism in the daily press and media!
So what is happening in the investment markets right now? Well thankfully it seems to be all good news, as the change at the top has resulted in the £ gaining in strength (albeit slightly), government bond interest rates reducing, with increased confidence being shown by global investors and hopefully a sound economic plan to be announced within the Chancellor’s budget next week.
One big worry remains which is that, even though I expect there to be a better sense of co-operation between the new PM/Chancellor and the Bank of England and predictions are falling, there is the matter of what decision will be made with regard to increasing the Bank of England Base Rate this month. Even though inflation has fallen very slightly (by 0.1% last month) as has retail spending, there is clearly a need to act further in reducing inflation and that means increasing interest rates. I expect a full 1% rise (we can’t hide from reality for too much longer), but I think it may be just under that, although anything right now will come as a blow to the public at large, who are starting to feel the pressure of the new energy tariffs and rising prices generally.
It is good to see that the predicted peak for interest rates has lowered with the introduction of the new Prime Minister, from around 6% next year to nearer 5%, but the fact remains that we have to get there at some point and I expect the PM/Chancellor will be making some hard and unpopular decisions in the weeks ahead, alongside the Bank of England; after all our base interest rate is still at 2.25%, a very long way from the 5% predicted. In simple terms, another 2.75% interest added to a £150,000 mortgage would amount to a further £340 of monthly repayments! Worrying for many who have not fixed their mortgages over the medium term earlier this year, or have reviews coming up in the year or so ahead.
Throw into the mortgage interest rate conundrum the fact that personal loan rates will be increasing; many car finance companies have put their rates up by as much as 2% this week, we can start to get a feel for what may happen in certain overheated sectors such as property and car sales.
In terms of investment markets, a lot of the bad news to come for the public at large has already been factored into current valuations, as I’ve mentioned previously in other blogs, and taking the investment property sector as a prime example, we have seen a 10% fall in values within this area of investment in the last month, as valuations are being adjusted to allow for what is to come.
The impact of the slow and maybe insufficient decisions taken by the UK during the past 12 months and the malaise of Summer when we were effectively without leadership, have been laid bare in the performance of UK investment markets versus their overseas peers, with shares falling by around 14% compared with 10% falls elsewhere globally and corporate bond markets and government gilts falling by around 20% compared with 10% globally. We need to act and hopefully this will be the start in terms of attracting back the investment which the UK last lost over recent months. It is not to say that anywhere else is not struggling also, it just feels like we have it worse!
There is much to cover and discuss as I’m sure you are all finding right now and I would be delighted to just be able to write about a rapidly improving situation for investors in all of my forthcoming blogs, but if this proves to be the case, it will not be without witnessing a lot of public unrest, as measures and increasing prices really start to bite. One thing is for sure, it will be a tough Winter for many (and for businesses) as the impact of less surplus income starts to really bite; but looking ahead, I hope that any financial pain is relatively short-lived and manageable, with better times ahead.
Again, from an investment perspective, the positive triggers to look for are a strengthening £, falling inflation rates and a robust plan for reducing the UK’s centralised debt issues (this may be announced next week).