Inflation, interest, recession, and war

I hope that this update finds you keeping well, and you have enjoyed the jubilee celebrations over the last four days. 

The Ukraine war rumbles on and this now looks to be a conflict that will continue for some time yet. 

I still can’t believe what we are seeing in these modern times with this being the first European war since World War Two. 

The depth and reach of Russian money within the world economy is still being fully understood and to my mind we may never really get to the bottom of just how deep this goes. 

It seems that circa 62% of European gas and oil is still being provided from Russia. Dare I say until such time this does change then sanctions and seizure of assets will have only so much of an impact. 

The US Federal Reserve (the Fed) finally made their much-expected move with a 0.5% increase recently. 

This now sees the US rate at 1% and this is the biggest jump since 2000, preceded by the first movement in March since December 2018.

The expected outcome here is that the Fed will increase rates a further 6 or 7 times this year with rates being around 3% by early 2023. 

Looking toward the UK the Bank of England (BoE) made their move with an increase of 0.25% to see us now also at 1%. 

These central bank rates and most certainly the Fed is seen as a risk-free rate return, so this is spooking markets. What this means is the bigger growth companies are then having to chase a 3% return to just keep up with a risk-free rate but with an equity profile (risk). 

If this was the case today a 3% risk free rate would still see us having a negative 5% return with inflation running at 8% (and maybe more). 

The driver behind these rate increases is to try and control inflation, which has got out of hand. 

However, it can be said that the energy crisis and supply issues are driving inflation and neither of these will be affected directly by central rates increasing. 

What these increases will do is make borrowing more expensive and increase the chances of corporates not being able to afford credit payments. 

There is some thinking that by making products, services, and debt more expensive this naturally will reduce demand and in turn reduce inflation. 

We are at somewhat of a pinch point I feel right now with higher inflation, rising interest rates, lack of supply and basic materials, increasing energy costs, war and covid all being part of this story. 

Let’s say it’s a perfect storm. 

On the back of all this, world indices are trading at much lower price point than the start of the year and this can create both short- and long-term opportunity for active managers. 

To give some background on this the S&P500 has seen the worse opening weeks of a year since 1932.  

As of writing this the year-to-date return is -13.80%. 

I wanted to add a little more context here as the S&P500 is very widely reported but doesn’t hold all the much talked about FAANG’s (Facebook, Apple, Amazon, Netflix & Google). 

All have had a torrid time since the turn of the year, I have laid this out below with Microsoft and Tesla given their size for good measure. 

Facebook             -43.28%

Apple                    -18.13%

Amazon                -26.61%

Netflix                   -66.97%

Google                  -20.82%

Microsoft             -19.71%

Tesla                      -33.43%

Except for Facebook and Netflix who both have their own issues the others really remain to be good businesses with good fundamentals. 

Yes, they have not reached the dizzy heights of return we once had seen but they remain in very positive ground and will be around for many years to come. 

Interestingly we are now seeing investors buying up these stocks at a massive discount. Even if these stocks only recover say 50% of these losses, then there is a massive amount of room here for profit. 

A buying frenzy it is not but, these valuations are now attracting more and more interest that is for sure. In April we saw net inflows verses outflows this means more money coming into funds than leaving. 

Looking past all this a quote that keeps coming to mind is “it’s not timing the markets, its time in the market’s”. 

We are investors, not traders and investing as we do mean these events will affect our views on things, but our overall fundamentals remain the same. 

The approach we take and the diversification we employ means we are less concerned when you enter but how long you can just leave the investment alone for.

Finally, cash returns have moved up (at last). Looking toward savings rates, instant access accounts should now be around 0.75%. 

Your Cash ISA should be 1% along with 2% for 1-year fixed rate bonds. 

Interest rates will increase as central rates move so locking into fixed rates right now might not be the best move. Of course, this comes back down to your own personal circumstances. 

I do expect the cartel of the big banks to make some rate increases soon as we have now seen the cost of mortgages moving upward. 

It’s not all doom and gloom, we have seen markets like this before and we will see them like it again in the future. The key here as per the covid markets is to ensure we make good, measured decisions and there are no knee jerk reactions. 

As always, please feel free to get in touch if you do have any questions at all or require any help in any way. 

*All the figures quoted are correct at the time of writing this update. The values here are moving daily and could well differ from the figures quoted.