I wrote last month “Things change. Habits change, responding to the shifting economic background.” Well, Mr Kwarteng appears to have shifted things with his rapidly compiled non-budget. Whilst his long term aims of restoring the nation’s productivity and growth are to be applauded, one can’t help but feel he has tried to cram in too much too quickly, unsupported by the usual independent analysis by the Office of Budgetary Responsibility, however inaccurate these often tend to be. That is certainly the view markets took in the immediate aftermath of his disclosures. One can appreciate that, with a General Election fast approaching, time may be of the essence but one can’t help but feel another month or two spent on building a better background to support his measures may have seen stronger acceptance. And it was surely a mistake abolishing the 45% tax rate band at this early stage. The amount of money involved is miniscule but it has created a marvellous headline for the left to beat him with at a time when levelling up is the in-phrase. Now we have to wait until 23rd November for the supporting detail and forecasts to emerge, which seems an unnecessarily long void. More haste, less speed perhaps, Chancellor!
However, the comments thrown around by the IMF are unhelpful and unwarranted but probably no more than one comes to expect of this organisation these days. When did it become any business of the IMF how a nation chooses to apportion its taxes? And let’s not forget that the IMF’s economic forecasters have a pretty poor record in recent years – it is noise we can do without.
So much has been made of the Sterling crisis but, in truth, the pound’s performance versus the Dollar is only marginally worse than the Euro’s and the Yen’s. It is really a global problem caused by the strength of the US Dollar as the Federal Reserve has taken a more hawkish stance on interest rates than most of the world in response to inflation. As I have written previously the root of the inflation problem is already in reverse. The oil price is now approaching 30% off its peak and gas prices in Europe close to 50%. Even allowing for the 18% fall in £/$ rate since inflation really took hold earlier this year, that is still a sizeable positive for the UK in the cost of both energy sources. It is very likely the energy price cap rolled out by the government will be less costly than first envisaged.
As previously mentioned, money supply has been in rapid decline throughout most of this year. This usually precedes declining economic activity and can be a signal for forthcoming recession. Against this background it seemed unwise that the Bank of England announced a week or two back that it was going to embark on a period of quantitative tightening by, not only allowing £40bn of bonds to mature each month without re-investment of the proceeds but also by selling a further £40bn into the market. Every cloud has a silver lining, as they say. A short-term crisis that blew up overnight as pension fund long term gilt collateral lost value and endangered widely held “Liability Driven Investments” prompted the BoE to reverse its decision and buy long term gilts to stabilise their values. They will at some point revert to the tightening process but, when they do, they will hopefully refrain from doubling up the maturing bonds with market sales. You can bet your boots a handful of hedge funds will have done very nicely out of this little mess.
All of this has seen the stock market battered. Not only that but there has been nowhere to hide. Bonds have weakened and have dragged down virtually all income focussed investments. REITs, infrastructure funds, fixed interest funds have all been rotten. Even the energy storage funds have succumbed. Gold has fallen 17% in Dollar terms since March although it has more or less retained its Sterling value. So what does the income investor do? Reverting to cash means they undermine their income whilst staying invested sees a loss of capital. It is important to remember, though, that this is a paper loss and holding the investment through the full cycle will probably see recovery of that capital or, at least, most of it. Our advice would be, if you are reliant on the income, stay invested.
As for the wider market, whilst the FTSE 100 is off 10.5% from its February peak, this index is not a good benchmark due to its ever-changing constituents and heavy weighting of resource and bank stocks and multi-nationals. A more sensible measure is probably the FTSE 250 which is far more domestically focussed. This index has lost 25% this year and 30% since its 3rd September peak last year. A bear market is defined by a decline of more than 20% and the average length of a bear market is around ten and a half months. The FTSE 250 decline is well beyond both these measures so perhaps it is time to be thinking of dribbling a little cash into this area of the market. If UK equities look cheap to the US predators following Sterling’s decline versus the Dollar, then the constituents of the 250 Index must offer them fantastic value. Food for thought in nervous times and we will try to unearth a few situations over the coming month or two.
Russell Dobbs FCSI
Chartered Wealth Manager
