March 2024 Investment Commentary

The conflicts in Gaza and Ukraine continue to influence the macroeconomic situation. The ongoing issue for 2024 is the trajectory of inflation and interest rates in all developed markets.

The Bank of England raised interest rates fourteen times between December 2021 and August 2023. The US Federal Reserve has paused rate rises and continues to sell assets. Expectations have risen that the next interest rate movement will be downwards, but questions remain about the timing and extent. Overall, there is less money in the hands of consumer, business, and the economy. Yet most developed world governments continue with loose fiscal policy and this push and pull means volatility will continue as markets continue to adjust to the unfamiliar environment.

2022 and 2023 were difficult conditions for debt, such as loans to governments, known as Gilts, and loans to companies, known as Corporate Bonds, as their fixed interest became less competitive as interest rates have risen, and values fell.

Rising interest rates have helped savers with a wider range of options for cash than for more than a decade. With inflation reducing, there is less risk of a permanent loss of purchasing power when inflation is higher than interest earned. The new era of higher interest rates has reduced mortgage affordability. This means house prices have fallen.

The signs are that the economic medicine of higher interest rates is working. Meanwhile, the conditions offer better support for traditional ‘value’ shares, rather than ‘growth’ stocks, as well as real assets that have revenue streams with some form of inflation protection.

*An increase in yield means a decrease in capital and vice versa.

Why most people do not need to act during periods of uncertainty:

Time in the market, rather than timing the market, is often the key to successful long-term investing. If you sell today, then when do you buy back? We believe investments should be held for the medium to long-term. Portfolios are spread and so not overexposed to one asset class, and this means you are highly unlikely to be fully invested in shares.

It is not advisable for medium to long term investors, whose attitude to risk and circumstances have not changed, to alter a diversified portfolio because of short term volatility:

• Fidelity International published data on returns from the FTSE All Share for fifteen years to the end of February 2023, which shows the effect of short-term volatility. The effect of missing the ten best days in the market is that returns are cut from 6.2% per annum to 1.7% per annum. Missing the best thirty days makes returns negative at -3.2%.
• Therefore, consistently timing the market whether out or in is incredibly difficult. Nobel Laureate William Sharpe found that ‘market timers’ must be right 82% of the time to match the return realised by long term investors.
• This underpins our belief that investments should be held for the medium to long-term. Since 1899 the UK stock market has outperformed cash in around 75% of five-year periods and around 90% of ten-year periods.

Who needs to act, and if so, what action:

• Investment risk refers to the range of returns, with the greater risk taken leading to the greater range of returns both positive and negative. If you feel your risk tolerance might have changed, or you want us to check the ongoing suitability of the portfolio based on your risk tolerance, please ask us for a fresh Risk Profile Questionnaire.
• If you a short-term investor, which means you are approaching taking benefits from your pension in 2024 or have a known or emerging need to take a capital withdrawal from your portfolio, you need to contact us so we can assess your options.
• If you take fixed regular withdrawals from your pension or investments, sharp market movements are to be avoided and it is necessary to review the ongoing sustainability of these payments. If you are spending less, then withdrawal reductions might be affordable.
• It is important to keep a buffer of six to twelve months of outgoings in cash deposits. Cash interest rates have improved.

Issued: 1 March 2024. Expires: 1 April 2024