Key Points:
- Through 2022 markets have been grappling with inflation, global monetary policies and geopolitics, UK fiscal policy has added to this roster of concerns.
- Market reaction to the emergency budget was swift and violent, sterling plunging to all-time lows. Gilt market reaction was unprecedented for the speed with which government yields rocketed higher, plunging prices lower.
- We believe central banks will continue with their tightening of monetary policy, their number one priority to ‘slay’ inflation and a return to price stability.
- Markets are in the process of re-calibrating towards reduced liquidity, the more expensive cost of borrowing and the potential for tougher economic conditions will likely lead to a deeper than expected recession. We believe markets are close to pricing in these concerns enabling us to take advantage of these lower prices for the medium to long term.
- Over the last two weeks we have been streamlining portfolios as we prepare for our exciting move to the new Asura platform.
- We have been actively managing the equity sales and re-investment during these volatile markets, benefitting from elevated cash levels before buying the iShares MSCI world ETF in carefully planned tranches when markets stabilised.
- We have also taken the opportunity as discretionary managers to reduce the equity weighting for portfolios, positioning them at the lower end of our allowable equity allocation, on a short-term tactical basis, whilst maintaining mandate suitability. To date the elevated cash positions and lower allocation to equities has greatly benefitted portfolios.
An eventful September:
Former British Prime Minister, Harold Wilson once stated that “a week is a long time in politics”. The same can be said of the global markets and the past week has been no exception. Through most of 2022, markets have been grappling with inflation, global monetary policy and geopolitics, most notably the war in Ukraine. However, UK fiscal policy has added to that roster of concerns, following the UK government emergency budget on Friday 23rd September with cuts to business and personal taxes as well as measures for deregulation, all designed to stimulate the supply side and promote economic growth. However, the announcement swiftly sent seismic shockwaves through the markets given these measures have been likened to pouring petrol over the inflationary fire, at a time when the Bank of England has been fighting hard to get inflation under control.
How the Markets Reacted:
The market reaction was swift and violent; Sterling plunged to all time lows, the gilt market reaction was unprecedented for the speed with which government yields rocketed higher, plunging prices lower. The UK stock market took a battering especially the FTSE 250 Index which is more aligned with the domestic market. In short, the UK market was temporarily in chaos with foreign investor money fleeing as the credibility of the UK government and their ability to maintain a stable economy came into question. Thankfully, the Bank of England came to the rescue and began to purchase gilts again, stabilising the gilt market and averting a potential financial crisis. At the time of writing Sterling has rallied off the lows and gilt yields remain elevated but stable. However, we are not alone in this fight against inflation and all markets around the world have had a turbulent September as they have priced in not just the events in the UK, but policies and concerns on their own shores.
Outlook:
We believe that Central Banks will be continue with their tightening of monetary policies, given their number one priority is to ‘slay’ inflation and a return to price stability. The US Federal Reserve leads this charge which has helped power the US Dollar to near record highs against all major currencies. We continue to see inputs into inflation move lower such as key commodity prices as well as leading indicators pointing towards a slowdown. However, the US housing rental market has remained stubbornly high and employment strong which places upward pressure on wages. Rates will continue to rise until it has become clear that inflation is back to more normalised levels; only then will the Federal Reserve stop raising rates and potentially pivot to a more accommodative stance.
The markets are in a process of re-calibrating towards reduced liquidity, the more expensive cost of borrowing and the potential for tougher economic conditions that will likely lead to a deeper than expected recession. We believe that markets are close to pricing in these concerns, and that eventually opportunities on a geographic, sector and stock level basis will enable us to take advantage of these lower prices for the medium to long term.
Changes to the Portfolios Investments:
As we detailed in our correspondence over the summer and as part of our exciting move to the new Asura investment platform we have over the last two weeks prepared portfolios for the migration. Portfolios have now been streamlined to ensure the transfer across to the new platform is a smooth process. The UK listed holdings remain in portfolios and the iShares Core MSCI World ETF has replaced the international equity exposures. Meanwhile, cash temporarily replaces the fixed income and alternative holdings that cannot be transferred as part of the migration.
The Equity Allocation:
Through the process of transitioning the portfolios we have been actively managing the equity sales and reinvestment during these volatile markets, benefiting from the elevated cash levels before buying the iShares MSCI World ETF in carefully planned tranches when markets had stabilised. Furthermore, we have taken the opportunity as discretionary managers to reduce the equity weighting for portfolios, positioning them at the lower end of our allowable equity allocation, on a short-term tactical basis, whilst maintaining mandate suitability. We anticipate the next few weeks could present additional bouts of volatility as 3rd quarter earnings results are announced, which we believe could signal further challenges for certain sectors and companies in light of central bank policy tightening liquidity and slowing demand. To date the elevated cash positions and lower allocation to equities has greatly benefitted portfolios.
We expect that once we have successfully migrated to the new Asura platform, we will be in a position to reintroduce the international holdings at levels that present excellent pricing levels for clients over the medium to long term. We plan to gradually bring the equity allocation back up to our strategic asset allocation, over a period of up to six weeks, depending on the prevailing market conditions and economic outlook.
Final Thoughts:
2022 to date has been a challenge for investors as the world has had to contend with heightened geopolitical concerns, inflationary pressures not seen for a generation, and the prospect of a challenging recession. As we had telegraphed in 2020 during the darkest days of the pandemic, we will again see a return of positivity and a recovery with an economy in better shape than before, and new exciting opportunities to invest into. We had been cautious in portfolios entering 2022 and remained well diversified across the asset classes as well as regions and sectors, which combined with the balance between value and growth exposures has served to limit the downside for investors. As long-term investors, we are excited for the opportunities that will come into view in the coming months and years and look forward to more positive times ahead.
Important Information
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and the value of an investment, and any income from it, may go down as well as up and the investor may not get back the original amount invested.
