3rd Quarter Market Update

I hope that this update finds you well and you have had an enjoyable summer with Autumn and named storms now upon us. 

Looking back over my past years commentaries as I have said for some time now with Strictly Come Dancing and the Bake Off on our tv screens this starts the run into Christmas for me. 

I have delayed this update a little given the focus on interest rates being so high right now. 

With the most recent meeting now behind us and no change to the current 5.25%, my following comments will not have to guess what’s next. 

The last quarter has continued in the main part to what we have seen for the year so far with price pressures on the consumer. 

Yes, there was good news in August where we saw a fall in year-on-year inflation to 6.7% from 6.8%. However, we still saw 12.1% food inflation in September but that was down from 13.6% in August. 

Moving forward, we must now accept that inflation will not be 2% and this could well now have to be more like 3% plus. The Bank of England have continued to nail their colours to the mast of 2%, but they may have to soften this in time when inflation hangs on. 

With the last bank rate increase from 5% to 5.25% in August in some part we may have seen peak rates now. With the ability of seeing the rate meeting on the 2nd of November we can see that for the second month rates have been held. 

Some major providers are now reducing fixed rate savings for 1, 3 and 5-year deals. This has gone hand in hand with mortgage rates being reduced as well. 

So, are we passed peak fear, rates, and inflation?

That’s a very hard question to answer here but we have had a decade or more of low rates and no inflation to speak of. This environment has been favourable to most sectors, and this has fuelled corporate growth and property. 

With property in mind, we are now seeing some slowing once more in residential sales and completions. With the data for the 3Q being quite flat the market has cooled for sure. 

Commercial property struggles along, and we are now seeing some property funds being closed due to lack of demand. Not all commercial funds are doing this, but higher rates are making an impact here. 

Alternative and infrastructure assets are seen as bond proxies in a lower rate environment but with higher rates these asset classes are looking tired. 

Most portfolios will have exposure to these asset classes given their inflation linked nature and positive long-term returns. However, they do seem out of vogue right now and each sector is seeing some real bargains being snapped up by asset managers. 

This is like planting a seed today to enjoy a tree in years to come, but it’s the waiting around for the tree to grow that makes us all feel frustrated.  Now is the time for patience and a steady hand. 

To illustrate the pace that rates changed at the tail end of last year to now is shown on the chart below. 

As you can see this stepped pyramid approach upwards has seen some bigger steps along the way. We are now currently plateauing at the top and the Bank of England like all central banks are steadfast that rates can and will go higher if needed. 

National Savings took on £7.7 billion in September alone. What a way to end a quarter for them and that saw them pulling their very popular 1-year fixed rate bond. If rates are higher for longer why are providers dropping rates and pulling higher paying products? 

Our focus remains on the longer term and the steps in the chart above do concern me as these are the steps, we could see coming down the other way. Cash is seeing a short win, but this will not be the case longer term. 

There remains to be some real opportunities in the equity market and investors will take these opportunities. The US and Europe have seen some strong moves forward along with Japan this year. 

Asia and the UK do seem to be stumbling as things stand and looking toward Q3 we have seen money move away from UK Equities and move toward more fixed interest style solutions. 

As I write this final draft, there are now two months left of the year and of course we hope for a strong Santa rally as we close the year out. 

But … on the 22nd of November the chancellor will deliver his Autumn statement and past statements have thrown the odd curve ball here and there. 

We will of course provide an update on this shortly after the statement once the dust has settled. 

Please feel free to get in touch if you do have any questions or just want a catch up.