Investment Market Update Sept 2022

We thought it might be helpful to explain the current uncertainty following the Chancellor Kwasi Karteng’s mini budget last week. His announcement has affected the value of the pound, stock markets and mortgages. His plan to lower taxation by borrowing when interest rates are getting higher has meant that many experts around the world have lost confidence in the UK. Also, very worryingly there wasn’t an independent report (by the Office of Budget Responsibility) published, so there’s no analysis on how his announcements will affect the UK economy.

The value of the pound has fallen significantly against the dollar. For various reasons the dollar is particularly strong at the moment, mainly because it has always been viewed as a safe bet for investment but also because the US has been raising interest rates to help combat inflation – which has given investors even more confidence in the dollar.

But last week’s budget has compounded the fall of sterling – on Monday it was the lowest it has ever been – and is forecast to go below one dollar early next year. This is bad news for the UK, not just because when you go on holiday you will get a lot less spending money, but also because Oil is priced in dollars, so we are paying more when we fill up our cars even though prices have started to fall. Also because the UK imports lots of things from the US – and these will also cost us a lot more.

Stock markets don’t like uncertainty and are very worried about the current UK situation. But lots of large UK companies have customers in US so can benefit from strong dollar and most people’s pensions and investments will be diversified – ie spread across different countries worldwide.

We have all noticed that inflation has increased hugely and how much more our weekly shopping costs, not to mention the huge cost of gas and electricity. The Bank of England uses interest rates to control inflation. This is done because higher interest rates make it more expensive for people to borrow money, encourages saving and overall means that people will spend less. Spending less means the prices tend to rise more slowly – which brings down the rate of inflation.

Because of the fall in value of the pound, the markets are expecting an emergency interest rate rise. This means that mortgage lenders are very uncertain about what they will be able to charge customers, so many have temporarily pulled mortgage products whilst they wait to see what is announced. Lenders price their mortgage interest rates against what is known as the Bank of England base rate which increased to 2.25% last week. Until last week the financial markets thought the base rate would increase to 4.5% by next spring – but they now think they might have to rise to 6% to restore confidence in UK economy and get inflation under control.

Large UK pension funds and many insurance companies hold UK government bonds as long term investments (these are known as Gilts and used by Government to finance public spending) and because of the instability they were being sold off. To calm the markets the Bank of England stepped in yesterday to start buying them back.

We have heard from several investment managers that they continue to believe that once inflation does start to drift down that will encourage a rebound in the share price of some of the investments which have performed extremely well in the past but have had a tougher time since the turn of the year. It has been a difficult and uncomfortable period for many investors during this unusually challenging time for markets. Unfortunately, the nature of equity investment means that there will always be times, such as this, where stocks and shares underperform and short-term volatility is the price we pay for higher long-term returns.