What a Senior Market Strategist just told me......
Wednesday 10th August 2022
Katy Baxter
One of the great advantages of the role I have is not only speaking to my lovely clients and their families, but also talking with fund managers and market strategists. You might think that sounds quite dull, but it really isn't! Our media have a fascination in focusing on the dour and negative aspects of almost everything, including of course the state of our economy, but having a more balanced and insightful view can provide reassurance.
It is always good to be able to reflect on the conversations I have with my clients, the concerns, and the financial planning priorities they have, and think about the economy/market information I receive, from their perspective. It's no good hearing from these amazingly clever analysts if the data and dialogue they give me doesn't help us understand what it means from a practical, every day, investor perspective.
And so, I will distil a few bits of the information from my conversation on 10 August with a Senior Market Strategist from one of our fund managers on the Montgomery Estate Planning panel, put it in easy-to-read bullet points, and I hope that you find it helpful:
• The definition of 'recession' in the US is different to what it is in the UK. US analysts reflect on a range of indicators in a 'bearish' market, and these are not likely to be as harsh as a UK definition
• Energy problems in Europe are because they are dependent on their Gas supply from Russia. There is a strong possibility that energy could be rationed in Europe over the winter months impacting both businesses and households. Any rationing to businesses could cause more recessionary fears.
• The UK is more secure in its energy sources than Europe as it is not so reliant on Russia, however, we do need to focus on renewable energy sources
• Risk of recession is higher in Europe that it is in US
• Inflation is likely to peak between now and October/November this year, then the market is predicted to turn and inflation is likely to fall quite sharply
• Asset Allocation strategies are currently quite defensive, as we would imagine them to be. This means staying underweight in equities although still holding the larger portion in US stock, staying neutral on short term Government Bonds, and increasing Bond terms gradually as things improve. Also, the current strategy includes staying underweight in Emerging Markets and having an emphasis overall on moving towards quality companies, with strong balance sheets, and who can pass on increasing costs to the consumer. Investment in infrastructure and commodities remains important, especially where rebuilding access to energy sources. Strategies are currently cautious on holding too much real estate, and are a little overweight in China tech equities in anticipation that these will grow in the shorter term
• The Chinese economy is of course an interesting subject to consider. They are in a different business cycle to the rest of the world and as such the end of Q2 saw a turning point in their economy with anticipation that it will grow from here. They have elections in November and President Xi Jinping will be keen to demonstrate that the economy is restarting. If the US can stay out of China and Taiwan political issues, there is unlikely to be war ahead of these elections. China owns a substantial amount of US Treasury Stock, which the US could freeze if they felt it necessary
• Markets are always running six months ahead of where we really are and increasing valuations have seen equity markets rally over recent weeks
• Whilst we haven't quite seen inflation peaking just yet, it will do soon, and then we can focus on growth and it is predicted that equities will rally quite quickly
• Any recession is predicted to be a short one as inflation reduces
• Housing market - unlikely to be much of a fall in house prices as supply is still not meeting demand. House builders remain cautious in terms of committing to major projects whilst recessionary fears persist, which also contributes to a lack of supply
Please remember that I am not an economist, nor a market strategist. These comments are of course my interpretation of the information given to us, and which I am now sharing with you. Ian, our COO, spends a lot of his time looking at the funds we include on our panel and talking to fund managers. He initiates and arranges the conversations that we have with funds managers at Goldman Sachs, 7IM, BMO, Fidelity...to name but a few. Our mission over the coming months is to spend time with these fund management teams so that we can ask questions that we think our clients would want to ask and pass on the answers to you.
The conclusions we come to when we speak to the experts is that diversification is key and being able to rebalance and adjust asset allocation quickly within a portfolio is fundamentally important to its long term success. It is no longer adequate to leave rebalancing of a portfolio to once, twice or even four times a year. We want our clients' portfolios to benefit from constant scrutiny and adjustment as the experts deem necessary, especially in times of turbulence. This is why we recommend using well researched Multi-Asset funds from high quality investment companies.
The value of your investments can go down as well as up, so you could get back less than you invested.
The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.