After many months of hoping normality would return to our world, I have decided (along with the encouragement of a good friend and client) that it is once again time to restart my updates on how I see the current financial and political climate influencing your investments and what this means for the ‘road’ ahead. I hope that it helps in some way!
This year has, to say the least, been a troubled one as the world attempts to move out of the post-pandemic slowdown. We have of course been hampered by the Ukraine conflict, but in investment terms, the over-arching problem has been that of rising inflation and the failure on the part of governments and Central Banks alike to tackle it sooner.
During the pandemic, Central Banks across the globe allowed governments, banks and larger businesses to raise funds by way of purchasing debt from them, in the case of the UK government these are known as gilts and the process is better known as Quantitative Easing. The problem with purchasing debt is that the interest on it has to be serviced and ultimately repaid; not a problem when the economy is moving ahead, but a big problem when we are beset by the once in a lifetime issues of emerging from a global shutdown into a war and a shortage of raw materials. As the scarcity factor of goods has pushed prices up, in-part causing inflation to rise, so has the cost of servicing the borrowing from the pandemic and prior to that (£80 billion a year at the last count!). As a consequence, interest rates on general consumer borrowing are having to rise to counteract this, which is what we are now seeing and fearing, especially painful as it is for homeowners with mortgages.
Conversely, if inflation falls, then national debt servicing should cost less and interest rates can be allowed to come back down again, which is what the Bank of England had hoped may happen within the next couple of years or so.
So where are we now in this curve? Well firstly, due to the inaction in addressing inflation last year, the problem has been allowed to manifest itself to a worse degree, meaning that steeper intervention with interest rate rises is needed. coupled to this the fact that we have a new Chancellor whose solution is to borrow even more money and to try and give this to people to help spend the economy out of trouble, which cannot work as it just drives interest rates up, and the latest giveaway to basic rate taxpayers amounting to around £300 a year has already caused the Bank of England to have to intervene, as money rushed out of the UK and into overseas countries due to concerns about the UK’s rising borrowing levels, this has caused the £ to fall sharply in value, which of course also makes everything we import (which is a lot of what we use) more expensive! Terrible plan, in fact it’s not even a plan!
So at the present time, we have the investment markets looking at the UK as something of a debt-laiden liability (which if the current Chancellor continues on his existing path may worsen) coupled to a fairly flat economy (although this is a global issue so may be less relevant in this context).
The combination of all of this uncertainty is unfortunately why we have seen investment markets continue their slide this year. The way forward, which was due to start about now, but has been well and truly scuppered by the mini budget, was for the Bank of England to follow the United States path of starting to ‘sell’ debt and gilts back to investors, which would then see our financial position as country strengthen and thus allow us more flexibility to try and assist the economy back onto its feet. However, the Bank of England are now fighting fires and having to actually ‘buy’ more of this debt.
To say we are in something of a vacuum right now would be a great description of events and it is clear that the Government and Bank of England need to become more aligned in their strategies. Globally, the issues which are now emerging in our day to day lives (energy bills increasing, interest rates rising, etc) are ones which the markets have been endeavouring to factor into investment values this year, so it would not be wrong to say that things could start to go positive once again and quite quickly, if the economy does get on track. Yes we are, I’m afraid, going to endure yet another difficult year on many fronts, but as we saw during the pandemic, investment markets tend to work ahead of the curve and so could start to recover before we see an improvement within our day to day lives.
Whatever one’s politics, the one thing we need right now is a sensible and informed government taking the right fiscal decisions and listening to the wisdom of well-versed economists before doing so. I think we can gather that this is not happening, so it’s a case of watch this space for now and hope for change.
The positive signs to watch for from an investment perspective are, the £ strengthening, positive growth in the economy (that may be a slow burner for now!) and a reduction of our debt load; in the immediate, there is a problem which has to be addressed this month, of finding around £40 billion of cuts in government and public services to pay for the recent mini budget handouts, whether the mini budget is reversed or where this will come from is what the investment markets (and the Bank of England) are waiting to hear!
I will keep you all posted on here, but please call me if you wish to cover anything at all with regard to your own investments. This blog contains my personal views and not those of the regulated sector but as you know, I will try to explain matters as I see them and I hope that it helps!