September 2022 Astute Investment Management Commentary
The last few days have seen uncomfortable conditions for investors, perhaps a good time to share our thoughts.
Following Friday’s tax cutting mini-budget (something of a misnomer), the drop in the already weakened sterling intensified, hitting a historic low of just over $1.03, before settling higher, and the cost of government borrowing (gilt yields) increased rapidly. This reflects the markets dismay towards unfunded spending commitments, and the likelihood that the Bank of England (BoE) would now likely raise interest rates higher in order to tame inflation.
Let’s digest this: a weak pound isn’t just bad news for holidaymakers, it will sting consumers buying imported goods, it can damage the integrity of the UK and squeeze margins for businesses importing from overseas. Whilst the energy price cap (£2,500 p.a. for two years for typical household usage, an announcement which has been largely overshadowed) will help to ease inflation, the weak sterling will provide upwards pressure to CPI.
The aforementioned gilt yield increase came after the government received a dressing down from the International Monetary Fund, who are now monitoring developments in the UK. This spooked investors, and (as markets move on demand) we saw the 30-year UK government bond yield to surge to 5.15%.
Following developments, the eyes have been on the Bank of England (BoE), with speculation growing over whether they will step in to intervene with an emergency interest increase (or other), to restore faith in the UK economy. Andrew Bailey confirmed that the BoE won’t “hesitate to change interest rates as necessary”, but reaffirmed an assessment will take place at the next meeting in November.
And by lunchtime, the selling off of UK government gilts had become so severe, the Bank was forced to intervene. They announced that they will buy as many long-dated gilts as needed (essentially reversing their quantitative tightening policy) to calm markets and restore financial stability, which is temporarily the priority above all else (including inflation).
This had an immediate impact on the gilt market, particularly the long end, bringing down the yield of 30-year gilts from a two decade high.
Many headline grabbing papers have last week, led with “RATES HEAD TOWARDS SIX PERCENT”, or something along those lines, due to some economists forecasting that the base rate in the UK could hit 6%. However, looking at the fundamentals as they are today, we believe this expectation to be over the top.
Headlines have also focused on mortgage providers who have withdrawn products from the market to reprice – this is largely due to uncertainty around interest rate increases rather than the expectation of drastically higher than expected interest rates.
VT Astute Fund Specific
Turning eyes towards our funds, our outlook towards equities remains positive for the medium to long-term, and we prefer equities over fixed income, which is reflected in our current tactical tilts.
Whilst we have been buying bonds in recent weeks as prices have moved lower, and yields higher, we remain slightly underweight to fixed income relative to our neutral asset allocation. This has been beneficial, given the recent unprecedented gilt market volatility.
Our fixed income exposure is highly diversified, both geographically, across maturities and style (i.e. sovereign bonds, corporate bonds).
Understandably, shocks to the market are not pleasant for investors, however, whilst we believe the turmoil of the past few days is likely to see more market volatility in the near future, long-term investors should take comfort in their financial plans and diversified investments; the market outlook for the long-term remains positive.
As always, if you have any questions, please speak to your financial adviser or a member of our team.