A Cheerful Outlook?
22 September 2023
To all Financial Friends
Less than a 2-minute read!!
My last commentary of late August talked of needing to await the return of fund managers from holidays to test what they thought of market conditions. Taking up the control of their funds, they seem pretty positive. From 18th August to today, 18th September all of the broad sweep of funds carried by our students, without exception, have risen. I can clearly see from the chart before me that most of the gain occurred in the last 18 days - presumably when fund managers were looking at their screens once again.
Look What's Happened in Just One Month!
One new student has seen gains on her three funds of +8.75% (Energy), +5.64% (FTSE 100) and +3.75% (Global Infrastructure) respectively. Other funds commonly held, report returns of +9.83% (Natural Resources), +9.61% (American Equities), +6.92% (Global Technology), +4.97% (Gold and Silver), Index Linked Gilts (+2.55%).
Text book 'lower risk' holdings such as Corporate Bonds, lending money to businesses put on 2%. Typical default funds, diversified Multi Asset funds, lagged behind at 1.45%.
So is there a firm foundation to this cheerful uplift? See what you think.
Some General Background
Globally the battle against inflation remains a big challenge. Controlling inflation is mainly achieved by raising interest rates so making borrowing more expensive. The higher cost of borrowing means less spending money in people's pockets. This leads to product and service suppliers having to reduce prices. Increase interest rates to high and you kill the economy leading to unemployment and a host of unhappy woes. Don't raise rates sufficiently and inflation remains marching onwards and upwards. Getting the balance right is essential for the financial well-being of you and me.
Today (21/09/23), interest rates here in the UK have been held at 5.25% reflecting the surprising slight fall in inflation to 6.7%. In the UK, USA and Europe there are those who think that interest rates are at their peak. I am not comfortable with that hope and suspect a lull period before rates rise again. Sometimes I like being wrong! The belief that inflation is being controlled is the main reason for the more positive outlook and the increase in the value of your funds right now.
Distribution of necessary goods and food supplies are affected by the Ukraine/Russia ongoing war, and global warming ruining harvests play their part in pushing up prices. The decision of oil suppliers to cap supplies, adds to rising costs - you have seen petrol and diesel rocketing up in price? Here in the UK our inflationary pressures seem worse than most other places. Strikes and demands for inflation matching wage increases are threatening stubborn inflation to remain.
Chinese Conundrums
My long-term friend Dr. Peter Warburton, a highly respected senior global economist, questions whether 'China is fuelling a global credit crunch that threatens to suck the life out of the global economy'. Should you not have been keeping your financial ear to the ground you will have missed the slowing of growth in the world’s second largest economy. You will remember the 'credit crunch' of 2008, the tentacles of which led to the printing of money, which in part, caused the rocketing inflation of today.
Peter's latest commentary from Economic Perspectives indicates that 'China's macro- financial model appears to be in difficulty'. What's that then? It's a complex mix of analysis of many factors that highlight the potential risks and vulnerabilities facing an economy. The fall of the Chinese yuan against the US dollar reflects investors concerns over the integrity of the Chinese credit system. Like other economies the Chinese have borrowed at low interest rates and are now caught out by the rising cost of servicing their debt against rising interest rates.
I value Peter's analysis highly - he has been right - seriously right, in his economic forecasts over the years I have known him. Looking two steps ahead of the market is what we always seek to do. When the USA or China suffer a slowdown in economic performance the effect the global economy is negatively affected. I meet Peter for coffee next week so a chance for some useful conversation and input.
Against the above, those holding energy and natural resource funds, infrastructure holdings, gold and gilts/inflation linked bonds may feel comfortable that these are appropriately placed.
A Matter of Many Facts
Balancing the negatives with positives, the fact(s) of the matter are that the stock market offers different assets that respond differently as economic circumstances change. This means there are always investments that will rise while other holdings may fall. There is always somewhere in the marketplace that will see your money grow, whatever the economic background. Students with a positive view, see that all the way through history, the stock market has survived and rewarded risk takers over time, and many times over.
Through two world wars, the great depression, cold wars, political upheaval, Covid, Boris Johnson, even Liz Truss, and much more, the market has proved its value. Those holding equities of the major economies are likely to be proved right in the longer term - especially if the equities chosen are in carefully selected sectors. Technology has proved to be one such sector. I am often amazed at how buoyant simply tracking the performance of the FTSE 100 Index has proved. Of course, past performance is no guide as to the future, so work with us in always looking two steps ahead.
Questions, Clarification or Just a Chat?
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PLEASE NOTE: A financial or economic commentary like these, are written to explain, interpret or give an opinion on economic events and markets to help readers understand what’s happening and why it matters. Designed to help you make informed decisions of your own by making you aware of opportunities, risks and potential rewards in the market.
