Taking a peek at the peaks

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.

Investing involves risk. The value of an investment can go down as well as up which means that you could get back less than you originally invested when you come to sell your investment. The value of your investment might not keep up with any rise in the cost of living.

Premier Miton is unable to provide investment, tax or financial planning advice. We recommend that you discuss any investment decisions with a financial adviser.

Peak interest?

You may have noticed that the title of this insight note refers to more than one “peak”. That is simply because it is unlikely that the policies being adopted by central banks over the rest of this year will be harmonised and could well send interest rates in different directions in different regions.

The big one

The US is the largest, most important and most influential economy in the world and all eyes and ears are focused on the actions and words that are coming from its central bank, the Federal Reserve (Fed). It moderated the scale of interest rate increases at its last meeting on 3 May, putting interest rates up by 0.25% to 5.25%, getting it back to the level it was prior to the global financial crisis, all those years ago.

There would have been two main reasons for slowing the scale of the rate increases. Firstly, there are signs that inflation is being tamed. The Consumer Price Index (CPI) has been consistently providing the evidence and now stands at less than 5%. Secondly, the Fed will still be wary of the problems in the regional banking sector and conscious of introducing any more stress into the banking system.

However, the Fed’s statement at the time of the announcement did point out that future CPI data would dictate policy and cautioned against any expectation that interest rates might be coming back down any time soon. This is where a conflict lies, as financial markets are, in fact, expecting that to happen.

I think there is a good chance they will be disappointed, inflation must be beaten, even at the risk of keeping interest rates higher for longer and causing recession in the economy. However, it may well be that we are at the peak of US interest rates.

The odd one

European governments and the European Central Bank (ECB) were trying to generate some inflation through the 2010’s to help stimulate economic growth, although they were unsuccessful. However, that problem has reversed and just as it has elsewhere, inflation has become a problem. The ECB also put interest rates up by 0.25% at the start of May, however, the news on inflation is less good than it is in the US and there is a good chance that the interest cycle has a little further to go.

The problem child

The CPI in the UK remains in double digits and hitherto has not shown much sign of budging. The Bank of England is painting a rosy picture when it comes to the short- and medium-term outlook for the economy. In my view, a little too rosy, and it is not out of the question that the base interest rate needs to rise to 5.0% from the current 4.5%, and that could mean more pain for the economy than is currently predicted.

Same old

It does feel like the battle against inflation has been on the go for some time. Raising interest rates is a blunt weapon, it remains very difficult to predict the impact of the increases we have seen so far. Inflation will fall as energy price increases fall out of the annual data over the next few months, but the underlying level of inflation is still a concern.

I think the strength of the economies here, in the US, Europe and elsewhere has been surprising and encouraging. However, the rest of the year is a concern; the data is not unequivocally positive and we are reading about the plight of the consumer in the press as mortgage rates rise and the cost of food and clothes continues to spike.

An economic slowdown would be the expected result of the necessary policy measures that have been applied and a recession, of one sort or another, is on the cards.

That doesn’t sound good for financial markets

Investors take future expectations into account when making investment decisions and therefore the prices of different types of assets; bonds, shares, gold etc, should reflect that, this is sometimes called “discounting”. In other words, financial markets discount the expectations for inflation, interest rates, economic growth and company profits amongst many other variable factors.

That means, theoretically, they are always valued at about the correct level. But, as we know, that’s the theory and the practicality is usually different.

At present, in my view, market levels are discounting that interest rates may well have peaked and could be falling, inflation is under control and any significant recession will be avoided. I fear it may not pan out like that. Therefore, some caution is advisable.

However, the fall in bond prices we have seen since early in 2022 has meant that the returns now available for the risk being taken are much more attractive and areas of the bond market look good value to us. Similarly, when speaking to the managers of our equity funds, they are all finding interesting companies in which to invest, furthermore, company profitability is holding up quite well. We can find many opportunities across all asset classes. But this is for the long term, the short term is the concern.

As we all know, investing is for the long-term and that is the approach we should take.

The last word

For several years now, financial markets have been driven by “macro” factors; inflation, economic growth and the like. This can result in investors focusing on specific traits and that has manifested itself in buying the “FAANGs”, the largest US technology and communications companies such as Apple, Amazon, Alphabet (Google), Meta (Facebook), Netflix, Microsoft, Nvidia and similar. This took place in the low inflation, low interest rate, low growth period through the 2010’s and through COVID, when the relatively strong growth in profits and revenues that these companies offered were much sought after. As we approach the peak in interest rates and worry about economic growth prospects now, company profits are at risk, therefore, the same factors are at work and the FAANGs share prices have performed very well so far this year.

Arguably, these companies have got to levels of valuation that are eye watering. Their share prices have risen much more sharply than their profits, which makes them more expensive than they were on different valuation measures. Importantly. they are large components of numerous stock market indices, such as the S&P 500 Index in the US and the MSCI World Index and drive these indices higher as their share prices rise. Many other companies whose businesses continue to do well fundamentally are left behind or ignored and their valuations appear low.

I look forward to us getting back to the time when fundamentals drive company share prices, not the macro factors.

 

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Risks

Investing involves risk. The value of an investment can go down as well as up which means that you could get back less than you originally invested when you come to sell your investment. The value of your investment might not keep up with any rise in the cost of living.

Government and corporate bonds generally offer a fixed level of interest to investors, so their value can be affected by changes in interest rates. When central bank interest rates fall, investors may be prepared to pay more for bonds and bond prices tend to rise. If interest rates rise, bonds may be less valuable to investors and their prices can fall.

The share price of companies (equities) can experience high levels of price fluctuation.

Forecasts are not reliable indicators of future returns.

Glossary

Assets
Different groups of investments such as company shares, bonds, commodities or property.

Bonds (or fixed income)
Types of investments that allow investors to loan money to governments and companies, usually in return for a regular fixed level of interest until the bond’s maturity date, plus the return of the original value of the bond at the maturity date. The price of bonds will vary, and the investment terms of bonds will also vary.

Bond yield
This is calculated by taking the level of interest paid by the bond, divided by the price of the bond, expressed as a percentage. As the price rises, the yield falls and vice versa.

Consumer Price Index (CPI)
The Consumer Price Index measures the overall change in consumer prices based on a representative basket of goods and services over time.

Equities
Another name for shares (or stock) in a company.

Inflation
The rate of inflation is the change in prices for goods and services over time.

Macroeconomic (Macro)
The overall economy of a country or region. Macroeconomic factors include; inflation, interest rates, unemployment and gross domestic product, amongst many others. These are used to describe the health of an economy and will effect financial markets.

Valuation
The total of a company’s assets minus its liabilities. The net asset value per share is the total of a company’s assets minus its liabilities divided by the number of shares in issue.

IMPORTANT INFORMATION:

Whilst every effort has been made to ensure the accuracy of the information provided, we regret that we cannot accept responsibility for any omissions or errors.

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.

Reference to any stock, fund or investment should not be considered advice or an investment recommendation.
Premier Miton is unable to provide investment, tax or financial planning advice. We recommend that you discuss any investment decisions with a financial adviser.

Issued by Premier Portfolio Managers Limited which is registered in England no. 01235867, authorised and regulated by the Financial Conduct Authority and a member of the ‘Premier Miton Investors’ marketing group and a subsidiary of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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The information in this site is solely for the purpose of acquiring information as, or for, an Institutional Investor (a corporate or other non-retail investment professional acting for their own account). This information must not be used or relied upon by anyone that may be considered a “retail investor” by the home regulator of the country from which this site is accessed.  

The information contained in this website is directed at persons who are resident in the United Kingdom and complies with appropriate UK legislation and regulations and is not directed at, nor intended for distribution to, or use by, persons in any jurisdiction in which the dissemination of such investment related information is not permitted.

The information or opinions contained herein should not be construed as an offer, or solicitation to deal in any investment or fund nor shall any such investment products or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful or in which the person making the offer solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation.

Premier Miton Investors has expressed its own views and opinions on this website, and these may change and there is no obligation to update them. Nothing in this website should be construed as investment, tax, legal or other advice. The information contained herein is subject to change without notice.

Neither Premier Miton Investors nor any of its group companies or affiliates accepts any liability for any losses arising directly or indirectly from any information accessed from this website, to the fullest extent permitted by law.

By clicking accept you acknowledge that your use of this website is subject to our privacy policy, cookie policy and our general legal and compliance information available on our website.

THE UNITED STATES OF AMERICA: The investment products referred to on this website have not been and will not be registered under the United States Securities Act of 1933, as amended. They may not be offered or sold in the United States of America, its territories and possessions, any State of the United States of America or the District of Columbia or offered, sold or transferred to US Persons (as defined below). The investment products referred to on this website have not been and will not be registered under the United States Investment Company Act of 1940, as amended. Premier Portfolio Managers Limited has not been and will not be registered under the United States Investment Advisers Act of 1940.

 “US Person” generally includes the following: (a) any natural person resident in the United States; (b) a partnership or corporation organised or incorporated under the laws of the United States; (c) any estate of which any executor, or administrator, is a US Person; (d) any trust of which any trustee is a US Person; (e) any agency or branch of a non-US entity located in the United States; (f) any non-discretionary account or similar account (other than an estate or trust) for the benefit or account of a US Person; (g) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organised, incorporated or (if an individual) resident in the United States; and (h) any partnership or corporation if: i. organised or incorporated under the laws of any non-US jurisdiction; ii. formed by a US Person principally for the purpose of investing in securities not registered under the 1933 Act. In addition, a Shareholder must qualify as a “Non-United States Person” as used in the US Commodity Futures Trading Commission (“CFTC”) Rule 4.7.

 Investment products referred to on this website may not be sold or transferred to a US citizen, or an entity taxed as such or required to file a tax return as such under the United States federal income tax laws (a “US Tax Resident”). If those investment products are held by a US Person, a US Tax Resident or a person who does not qualify as a “Non-United States Person” within the meaning of CFTC Rule 4.7, Premier Portfolio Managers Limited shall be entitled to redeem such Shareholder’s entire holdings.