Crunch time

Market report

• The latest on the UK and World – where next?
• Pay down debt? Invest? Some thoughts…

CIO view

The situation in the UK continues to move so fast that committing words to paper feels like folly. However, as of now, sterling appears to have stabilised. For how long remains a matter of intense debate amongst market participants and beyond. UK government borrowing costs for the decades ahead and the path that the Bank of England is expected to tread are both substantially higher than before the budget as the charts below highlight.

There is a global element to this of course. Incoming data on the US economy demonstrated how much work remains ahead for US central bankers in their efforts to cool demand. We will see more next week, but the sense remains of an economy that continues to push too hard on its constraints – inflation is a long way from a beaten foe just yet. Until we see plausible cracks in US demand for workers and more besides, we should expect the Federal Reserve to remain on the front foot in both word and deed.?That may mean that ‘King Dollar’ continues to lord it over the competing currencies to a historic degree. Stock and bond markets could easily continue to deliver more of the same in the months ahead.

If the central bank battle against inflation is the global theme, there is much regional nuance for investors (and residents) to take note of. China remains faced with a daunting set of challenges – the slow-motion implosion of the one property bubble to rule them all has many (again) predicting a ‘Minsky moment’[1] has finally arrived. There is no end in sight to war in Europe, amidst the escalations of the last few weeks. Meanwhile, the Italian electorate has delivered a government that will, at the very least, complicate EU efforts to enforce some cohesion on the rule of law and democracy amongst its member states.[2] Brazil could soon be struggling to persuade an outgoing leader of the same.

Even in a world convulsing and fitting to this apparent degree, this last week in the UK stands out. The Bank of England seems to have bought some temporary calm with its time limited return to aggressive bond purchases. However, the range of probable outcomes for the UK economy has shifted substantially darker in the last week. All is not lost of course, and we should tune out some of the commentary too visibly surfing waves of schadenfreude. Economics (and economic history) can provide base lines for what to expect from various policy changes, but never rules. The difficulty for this latest iteration of Conservative policymakers is market confidence. There is apparently medium-term fiscal clarity, backed by Office for Budget Responsibility (OBR) analysis, coming at the end of November. The question will remain however, whether investors get fidgety amidst incoming economic data or other news-flow. Decades of action condensed into each day of this week should remind us to keep our convictions in check. The housing market remains one of the many elephants crowding our little room.[3]

For investors, the questions raised by this last week are understandably legion. Should I pay down my mortgage or invest is a common refrain? There can be no catch-all answers here unfortunately. Individual situations are sufficiently diverse, from taxes to the nervous condition, to mean advice is often necessary.

The point from us is none the less pretty simple. The interest rates charged in various parts of the UK and global economy represent just a part of the available opportunity set for the teams of specialist investors I’m lucky enough to represent. When building our multi-asset class funds and portfolios, our asset allocation team are not just looking at the returns available from lending to various entities, but how those returns tend to interact with returns from other parts of the asset class toolkit – from commodities to US equities. The point is to create an all-in-one exposure that makes the best of the returns available to a UK investor all around the world, in as many of the variety of different futures that lie ahead as possible.

The second point is hopefully more familiar. Don’t become too preoccupied by the chaotic patchwork quilt of doom seemingly enveloping the world. We, of course, don’t want to underestimate the challenges facing the world, and in some ways, particularly the UK. More suffering is being heaped upon a world that had already endured plenty these last few years. A(nother) global recession is surely imminent. However, those looking to make their precious savings work as hard as possible over the medium term need to remember that it is not what happens now in the world that matters – much of that is already incorporated into prices. What matters is what happens beyond this crisis. When inflation has likely been successfully cowed by central banks who have learned the hard lessons of history.

Substantial reassurance can be taken from the rising tide of Artificial Intelligence (AI) associated innovation among many other breakthroughs that lie on the plausible horizon. To scoop these rewards, the fixed rates available from lending (or paying down) or just sitting in cash, will not be sufficient. Ownership of companies, with that diversified package of investments we and others offer is the key. That call option on future human productivity happens to be attractively priced now.

[1] https://www.investopedia.com/terms/m/minskymoment.asp

[2] https://www.piie.com/blogs/blog/italy-votes-coalition-further-right

[3] https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate

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