ABC IFA logo - image
FEIFA - logo image
Consumer Duty Alliance - logo image
Financial Vulnerability Charter - logo image

Issue 61 - Turning Points - Nowhere to Hide

They say that a week is a long time in politics, and I think this has never been more evident over the last week with the shambolic events unfolding in the UK!

As I am sure you know by now, I try to avoid making any strong political comments, but I do wonder if Boris Johnson is coming to the end of the road and although he has a history of defying the norm, it’s very difficult to see how his Premiership is going to survive the current turmoil. 

With the speed that things are moving, by the time I finish writing this article, he may indeed, have gone, or he could remain ensconced for some time to come – we shall see!

When I thought of the heading for this News Letter, I actually had in mind investment markets and I will revert to that shortly, but it occurred to me that it’s also a very apt heading for the UK political situation.

The current actions and reactions within the Conservative Cabinet and the wider party do seem to suggest that time for Boris is up and that they have indeed, reached a turning point.  We have to then remember that these are politicians that we’re talking about, who as we know, can be very slippery in their activities and will undoubtedly each have self-interest at heart.  I think the main concern seem to be that Boris Johnson, once a vote winner, will be a vote loser.

The trouble is, when you look across Parliament, it can be very difficult to pick out the genuine hardworking politicians, although one has to believe that there are plenty of them, but perhaps those that do n to habitually capture the headlines – or is that just wishful thinking, I wonder!

With a degree of scrutiny and speculation that’s ongoing at the present though, clearly there are few places left for BoJo to hide.

Turning now to the financial markets, and my main thoughts with regard to how things may be changing and that perhaps, we’re starting to see the first indications that the recent volatility will start to subside, and we will see some recovery in values.

Over the decades, there has typically been an inverse correlation between Stock Markets and Government debt (gilts and US Treasuries and other Government Bonds), such that when equity markets are under pressure, a safe haven has been the Bond market and the reverse having been true.

However, for the last decade, this inverse correlation has not been in evidence, which has given Fund Managers serious problems when considering how to hedge against equities and to find safer havens.  This has typically been resolved in recent months and years by moving towards commodities, such as gold, silver and other precious metals and absolute return funds, that are not reliant simply on one aspect.

One of the reasons why the Government debt instruments like gilts and US treasuries have been under pressure, is because their underlying yields have been increasing.  The yield is the rate of return or interest that is paid on these Bonds and as those yields have been rising, so the capital values have been reducing. 

From the investment commentaries that I read; I am starting to pick up …

Starting to see that this trend may now be reversing with yields dropping once more over the last 3 weeks on some Bonds.

My comment about nowhere to hide simply refers to the fact that on a year to date basis, we’ve seen major Stock Markets down by 20% - 30%, at the same time as the Government Bond markets have been down by a similar amount.  Ironically, one market that has bucked the trend this year has been the FTSE 100 Share Index, where Companies in there are predominantly benefitting from the rise in energy costs etc, but this is a trend that will reverse at some point.

Without the traditional reassurance of the Bond market being available and alternative investments having to be sought, it has been a very challenging time in the investment portfolio management world.

Talking to one Fund Manager last week, he was of the opinion that the volatility is likely to continue during the short term and actually, during the summer months, the volumes of trading in the Stock Market, tend to be much lower and therefore, smaller volumes can have bigger impact on market prices.  His view tough, is that this is likely to continue through the summer, potentially until September before we can start to see anything settling down.

In the last 2 days, I am starting to read articles from people talking about the current trend of increasing interest rates from Central Banks being transient and already they’re speculating that in 203, interest rates in the US, will not only peak, but start to reduce once more.

With these thoughts in mind, we’re starting to see some signs of the technology/growth Companies that have suffered so badly in the last 6 months, starting to respond to this type of news.

A further article I was reading a few days ago, was looking specifically at the S&P Index in the US and comparing years where the first 6 months of the year had seen dreadful performance, much the same as we have seen over the first half of this year, and what then happened in the second half of those years.  Almost without exception, there was a very strong bounce back, such that by the end of those particular years, the S&P had pretty much recovered its starting point. 

Of course, although history does repeat itself, we can’t rely on that being the case this year and we should also remember that the S&P is focussed on the US market, which tends to be more reactive in any way, but nonetheless, these are further indicators as to where we may be heading.

In general terms though, many commentators are recognising that certain areas of the market have been oversold, which means that prices are depressed beyond where they reasonably should be and there’s a certain element of throwing the baby out with the bathwater. 

I give you one recent example here, where a comparison was made by one Fund Manager between Curry’s and Dunelm.  The actual price earnings ratio for each of those Companies is almost identical at present, and yet, the Fund Manager said he would in no way be tempted to invest in Curry’s whilst he felt that Dunelm by contrast, looked particularly undervalued at this level and would make an excellent investment.

As we have said previously, markets tend to be cyclical and one of the other Fund Managers I was speaking to last week, expressed the view that when markets turn, they will turn quickly.  In these circumstances, it is often the early phase of recovery where the more dramatic growth is witnessed and missing that initial spurt can have disastrous effects, which is why the advice is always to remain invested.

One final thought on this subject is that there has been a huge amount of stockpiling of cash in pension funds and investment funds, all of which needs to find a home somewhere, and when that re-enters the market, as in previous cycles, this is likely to fuel the recovery further.

It’s not yet a time for celebrating, but I genuinely think this is a turning point that is starting to unfold.

AS always, only time will tell.

Stay safe and best wishes.

Best wishes from all at ABC

Alexander Bates Campbell Financial Planning Limited is entered on the FCA Register under reference 817090. Alexander Bates Campbell Limited is an Appointed Representative of Alexander Bates Campbell Financial Planning Limited and is entered on the FCA Register under reference 522399
https://register.fca.org.uk/
Alexander Bates Campbell Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. The FCA does not regulate taxation advice.

The guidance and/or advice contained within this website are subject to the UK regulatory regime and the European Markets in Financial Instruments Directive and is targeted at consumers based in the UK.
Alexander Bates Campbell Financial Planning Limited/Alexander Bates Campbell Limited
First Floor, Unit 9/10 Riverview Business Park
Station Road
Forest Row
East Sussex
RH18 5FS
United Kingdom
Tel: 0203 167 0880
Email: info@abc-ifa.com
If you wish to register a complaint, please write to us at the above address or email us as info@abc-ifa.com or telephone 0203 167 0880
A summary of our internal complaints handling procedures for the reasonable and prompt handling of complaints is available on request and if you cannot settle your complaint with us, you may be entitled to refer it to the Financial Ombudsman Service at www.financial-ombudsman.org.uk or by contacting them on 0800 0234 567
phonelocationcrossmenu