So far, 2022 has been a challenging time with a great deal of uncertainty. We have seen a sharp rise in inflation, the Russian invasion of Ukraine, supply chain problems, warnings of an economic slowdown and the recent Covid lockdowns in China. And we’re only in May!
Lots to consider, but what does it all mean?
- Last week the Bank of England released the latest inflation data, which has inflation, as measured by CPI (Consumer Price Index), currently running at 9.0%.
- This is up from 7.0% in March. The rise was mainly from energy prices as well as petrol prices. However, it is being felt everywhere.
- The Bank of England expects inflation to rise further to 10% before the end of the year with the war in Ukraine causing price increases to energy and food.
- The good news is that the Bank of England expects inflation to begin to fall next year and be close to the 2% target in around 2 years.
- The Bank of England has raised interest rates to 1% to try and combat the high inflation. This is in step with global central banks.
- Further interest rate rises may well be on the horizon. The Bank of England is walking a bit of a tightrope trying to get inflation under control without causing an economic slowdown.
- The good news is that there are now some deposit accounts paying a small amount of interest.
- Global stockmarkets have continued to have a bumpy ride.
- The FTSE 100 and value companies (shown below in the MSCI World Value line) have held up comparatively well to other indices.
- No-one knows where stockmarkets will go from here. The best strategy is to continue to hold a globally diverse mix of holdings and be disciplined.
- Stockmarket returns have, historically, been the best way to benefit from growth over and above inflation. I don’t see any reason to doubt this moving forward.
- Bonds have had a difficult time of late.
- The capital value of bonds tends to move in the opposite direction to yields. As inflation and interest rates have risen, this has pushed up bond yields. As such, the capital value has fallen. The good news is that you will benefit from a higher yield going forwards.
- Our exposure to short-term, high quality bonds has lessened the impact of these capital losses.
- Although bonds have had capital losses of late, generally, they are still more stable than stock markets.
What does it all mean?
The world can seem like a scary place at the moment; there has been no-where to hide with sharp falls everywhere from stockmarkets to bitcoin. Commentators have started to talk about bear markets and recessions. This means sharp declines in asset prices and some uncomfortable reading.
For those already invested; the message is to hold tight. Clients of ours are invested in a globally diversified mix. By staying invested we can benefit from when the recovery comes.
For those with money to invest; bear markets can be a great time to put some capital to work and benefit from the bounce (when it comes). You are still buying the same great companies that we would have done last year such as Apple, Facebook, Tesco, etc. Just at a discounted rate. With cash rates still low and inflation being stubbornly high, this is a good opportunity to build some value.
It’s impossible to tell when the bottom is, so it’s important not to over commit on cash. Make sure you have enough to sleep easily at night and try not to over-stretch on spending. This will mean you can avoid having to cash in investments at a low point.
To avoid making wealth destroying decisions during difficult market conditions is crucial. We sit beside our clients to discuss all financial decisions to make sure the decisions made are the smart ones, not the wrong ones.