Neil Birrell
Premier Miton’s Chief Investment Officer
For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions
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It’s time
I try to write these update notes around each month end, to comment on what has been going on in economies and financial markets and give a bit of insight into thoughts for the future. The last note was at the start of January; the reason I haven’t written one since then is because I keep waiting for the next release of important economic data or central bank announcement, in the hope it will provide some clarity to the economic backdrop. The opposite has been the case, so I have given up that hope and will jump in at the deep end.
It’s confusing
The economic data has been frankly ambiguous. On the day I am writing this, UK retail sales for January were announced, they were much higher than expected and higher than the previous month, which doesn’t really match with the constant talk of the cost-of-living crisis, looming council tax increases and the inflation data announced earlier in the week that showed inflation was falling faster than expected.
That is just one feature of the UK economy. We are seeing similar issues in Europe and particularly the US, where one set of data will tell us that the employment market is strong and another will suggest it is weakening.
From the final quarter of 2021, through 2022 and so far in 2023 financial markets have been driven by macroeconomic news flow, particularly on inflation and the policy measures announced by central banks. As the data is so difficult to predict, this has led to big and sudden moves in those markets. Investors are reacting to events and it is easy to get dragged into making decisions that could look foolish quite quickly.
It’s been a good start to the year though
The start to 2023 has been good overall, for those invested in equity markets. The general view is that inflation has peaked in the major regions and therefore the peak in interest rates is in sight as well. Although recently the timing of that has been pushed out a bit further, as has the hope of any cuts in rates this year, which has meant that bond markets have suffered.
It’s going to carry on getting better, isn’t it?
Maybe, maybe not. I’ll focus on the US for this purpose, as it is the biggest and most important economy in the world. The US central bank first started putting up interest rates in March 2022 and has been doing so aggressively ever since. It may well take 15 to 18 months for the impact of each increase to take full effect, that is known as “policy lag”, so we will not know until later this year just what an effect they will have had. It will be the same in all countries that have adopted a policy of increasing interest rates.
The outcome could vary from a gentle slowing of the economy (soft landing) to a fairly deep recession (hard landing). We just do not know, which is why the short term (by that I mean up to the end of June 2023) is more predictable and the medium term (the rest of 2023) is much less predictable. The longer term (2024 and the next 3 years) is more predictable again; economic growth will recover, but probably not that strongly given that inflation will be higher than we have been used to for a long time, as will interest rates. That is my view, anyway and I could well be wrong.
It’s time to sell then?
I don’t think so. Investors look a long way into the future and the valuation of asset prices typically reflects that. Clearly the medium-term uncertainty doesn’t help, but we should invest for the long term. When I look at the valuation of different asset classes (including bonds, equities and property), I and the wider investment team at Premier Miton can find a very wide range of investments within those and other asset classes that we are happy to buy and hold for the long term.
The last word
I have deliberately kept this note shorter than usual. Mainly because I have little doubt something noteworthy will crop up soon that requires comment.
I ended my last update with this; here is to 2023 being predictable, conventional and maybe even boring, and hopefully profitable. Well, so far it has not been predictable, conventional or boring!
