Dear Clients
What’s interesting? Precarious times we live in…
Inflation, particularly in the UK, refuses to go away. Our children see that when their fixed rate deal expires, the rate is going from under 2% to over 5%. The dreadful war in Ukraine continues and the leader of the Wagner Group appears to be in exile, so geo political tensions are ratcheting up not down, China’s language on Taiwan continues to be troubling…
The United Kingdom’s debt to GDP ratio tripped over 100% at the end of May, so tax cuts prior to a General Election look tough.
With all of the above is a recession not very likely?
Investing is only part of what we do. It is less than half of what we do (on a time cost basis). But, it is a key part of what we do. In short, in these worrying times, we continue to recommend investment in equities.
Highly rated fixed interest securities now yield 4% compared to less than 1% a year ago but inflation is now around 8% when it was 2% a year ago. It still makes sense for most clients to have a fixed interest rate exposure, but the total return right now net of inflation is still likely to be negative.
Recessions are commonly defined as existing when there are two consecutive declines in quarterly GDP. This odd definition does not really capture what a recession is – a messy, unpleasant contraction of an economy that damages businesses and consumers. Interest rates and inflation are high by recent standards, consumers are becoming more cautious and, globally, earnings per share are declining. Plus as I have mentioned before, we have an inverted yields curve. All of this points to a recession.
However, recessions and stockmarkets are not well correlated. Markets price all known information in and look forward. Some companies make money in recessions. Some stock prices increase during recessions. And while the media and governments can tell us when we are in a recession and when we are out of one, the reality is that recessions and recoveries are not like light bulbs – on or off. They are gradual and confusing processes. The investment secret is to stay invested while ensuring that you have sufficient cash to live comfortably while perhaps waiting for your portfolio to recover.
And finally, a few paragraphs up I point out that net redemption yields (anticipated total returns) on bonds are less than current inflation. As every single investor knows, inflation and interest rate rises just caused one of the worst performance years for bonds in living memory. But if interest rates and inflation come down, fixed interest assets generally rise in value…
There are few obvious answers to the conundrums investors face but we are delighted to have secured two excellent and experienced speakers for our July webinar. Garett Quigley and Andrew Cain from Global Systematic Investors (GSI) both have decades of experience in financial markets and I plan to put as many questions to them as we have time to cover. If you have any questions regarding recessions, housing markets, whether Environmental, Social and Governance investing is a nonsense, what new ideas there are in finance or anything else at all, please a) sign up for the webinar on the link below and b) email Nick (nick.west@satisuk.com) or I (ben.sherwood@Satisuk.com) your questions.
Our audited accounts will soon be on Companies House. Some years are financially tougher than others but we remain profitable and are growing. Thank you very much for your continued support.
Ben Sherwood
Satis Webinar – Sign up
Satis client webinar Tickets, Thu 27 Jul 2023 at 18:30 | Eventbrite