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October 2022 Astute Update

Often, despite all of the policies and plans discussed, the entrance music at a political party conference is the most talked about element of the gathering. Do you recall D:Reem’s “things can only get better”, the dancefloor filler used for the Labour party conference in 1997? I wonder if it will make a reappearance at some point.

Truss’ entrance to M People’s “Moving On Up” hit the headlines; given the lyrics to a popular verse in the song were played only a couple of weeks before the Chancellor was sacked, the choice now makes much more sense:

“Just who do you think you are? This time you’ve gone too far. Just who do you think you are? Take it like a man, baby, if that’s what you are. ‘Cause I’m movin’ on up, you’re movin’ on out…”.

It may be difficult to believe that this was arguably the biggest political news at the top of the week, that was before prime minister, Liz Truss, handed in her resignation!

You can read our reaction to the budget, volatile sterling and soaring gilt yields here.

In reality, there is much more behind our current economic situation (and the shape of markets) this year than politics: the ongoing war in Ukraine and great uncertainty that sits alongside, lingering supply and demand hangovers from the coronavirus lockdowns, high inflation, and rapidly increasing interest rates. You can read Astute Investment Management’s Quarterly 3 commentary, for our outlook, and key data that provide cause for optimism.



Given all of the above, markets have suffered so far this year, with global markets down almost 20% year to date, and bonds experiencing the worst year in over half a century.

We understand and fully appreciate that a fall in value of your investments can be unnerving, however, this type of short-term volatility is part and parcel of a long-term investment horizon, something which is considered and reviewed in your financial plan and can be discussed with your financial adviser

Unfortunately, we do not have a crystal ball to predict exactly when we will see market dips – those who claim to should be dealt with, with caution! However, we do understand that markets have downturns, enabling us to assess appropriate risk levels for clients and invest their portfolios accordingly.

Whilst past performance does not indicate future results, it is useful to look back at financial bear markets of recent history.

In the financial crisis of 2008:

  • Global equity markets fell from their peak by over 50%.
  • An investor who stayed the course, felt that 50% loss but remained invested in global equity markets for a 15-year horizon, will have seen the market up over 140% from the pre-financial crisis peak.
  • An investment made at the bottom of the market, would have seen an increase in the market of over 387% by October 2022.

Moving towards the present day, in the 2020 market downturn:

  • Global equity markets tumbled by over 32%, but recovered losses within 6 months of the drop.
  • If an investor stayed the course, and remained invested in global equity markets, they would now be up over 7% from the early 2020 peak.
  • An investment made at the bottom of the market would have seen an increase in the market of over 59% by October 2022.

It is important to remember your investment time horizon and financial goals, and avoid any knee-jerk reactions that could cause permanent damages to your finances.

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.

Source: Refinitiv Lipper as of 17/10/2022.


Gilt markets and pension funds

There has been a lot of movement in the bond world recently, and, given it is an asset class renowned for its historic low volatility and defensive characteristics, it is certainly noteworthy.

You’ll have no doubt heard murmurings, at the least, all about the Mini Budget, gilts, and the impact on pension funds, which may lead you to ask, “are they talking about my personal pension?”.

Firstly, the headlines are only referring to defined benefits pension schemes, and not defined contribution personal pensions. Secondly, the problem these funds have is more about liquidity than falling asset values. Essentially gilt values have fallen very steeply in value due to interest rates rising. In essence these bonds have been overvalued for a long time because of very low interest rates, and quantitative easing from central banks, meaning that there has been an uneconomical buyer in the market. Now, gilt prices are correcting. That’s normal, albeit very painful for some investors.

So, if this is normal, then why have the Bank of England intervened? That’s because certain types of pension funds – defined benefit schemes – are very exposed to this fall.

Let’s explore this – due to the way that these schemes calculate their future liabilities, as the value of gilts falls, so too does the amount of money the scheme needs to fulfil their future pension obligations.

If well managed the difference nets out at zero (gilts and future costs fall in line with each other); suffice to say, they aren’t really too concerned by the losses. This is exactly the reason that these pension schemes were willing to pay such extortionate amounts for gilts (at very, very low yields) in the first place. However, the speed of the fall in the gilt market meant that pension funds needed to raise cash more quickly than expected, even though risk managers were apparently ultra-cautious, and “over collateralized” their portfolios.

However, as mentioned earlier, the Bank of England intervened. They saw the threat to the UK financial system, and they stepped in. The fact that they gave a limited window for that intervention is a strong message that they will step in to secure financial stability, but they aren’t willing to backstop risk taking. The message was clear: “we will help you sell these securities in an orderly manner, but we aren’t going to take the losses for you”. The definitive deadline isn’t a huge concern, because, as highlighted above, those losses can be offset against the reduction in future liabilities within defined benefit pension schemes.

Whilst the issues outlined in this section have caused some volatility in markets, the gilt yield associated risk to pensions that hit headlines was due to a niche in the way defined benefit schemes are managed.

If you have any questions about any of the above, please reach out to your financial adviser.

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Autumn Mini-Budget Budget Overview 2022

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