Tales from a summer barbeque

Neil Birrell

Premier Miton's Chief Investment Officer

This update should not be taken as advice. If you are unsure about any of the content please contact your financial adviser. Please remember that the value of stock market investments will fluctuate and investors may not get back the original amount invested. To assist, where appropriate, a glossary explaining some of the terms used has been provided at the end of this update.

At a barbeque I attended over the August bank holiday weekend, the topics of conversation were not that varied and not very holiday like or light hearted. Although the group was not a diverse one and, I would guess, relatively financially secure by most comparisons, I suspect the topics would have been similar in many gatherings over the weekend.

You will be able to guess the themes; inflation, energy prices, interest rates (or mortgage payments), collectively known as the “cost of living crisis”. Throw in debate on who the next Prime Minister will be, government indebtedness, when could grown up children afford to move out of the family home, the war in Ukraine and Chinese intentions towards Taiwan and you get a long list of concerns holding attention in the UK at present. The group wanted answers! I think it’s fair to say, that other than possibly the political ones, the answers are wanted in most developed countries.

I guess, therefore, the next question that we should be asking is; can it get any worse?

The numbers are heading higher

Some of the forecasts for inflation in the UK are quite startling. If Citigroup’s prediction of it peaking at 18.8% is reached, or, worse, Goldman Sachs suggestion that it could be over 20%, it is possible that the Bank of England will have put interest rates up to 7%, or maybe even higher, to combat the problem (source: Reuters).

In the US, at the Jackson Hole Economic Symposium, the central bank continued to talk tough over its approach to tackling inflation. That means two things; interest rates will be heading higher and the reversal of other loose monetary policies (Quantitative Easing) employed through the pandemic will be reversed. The economy in the US remains robust relative to other countries and it may be able to handle rate increases better.

The Eurozone is more like the UK, and not in such good shape. Inflation is surging there as well and the only debate is how much the European Central Bank will put rates up by at its next meeting.

Similar factors are at play around the world.

Does that mean financial markets will head lower?

Not necessarily.

In aggregate, investors look to the future and make decisions based on what is likely to happen rather than what has happened. It is more a case of how far ahead they are willing to look. Just at the moment, though, you need to look quite a long way forwards to see light at the end of the rather dark tunnel we are in.

What fund managers do about it

I don’t know, but I would imagine that the crew at the barbeque have investments over and above their pensions and houses; they will use fund managers one way or another.

In conversation with fund managers in the specialist investment teams, across different asset classes at Premier Miton, it is difficult to find anyone who is positive in the short term. In fact, it would be relatively easy for me to come up with reasons not to own any of the main asset classes today.

Unsurprisingly, the fixed income team, who focus on government and corporate bonds, which typically suffer in periods like this are not talking of higher bond prices. So as a result, they are running the funds with lower risk profiles than would normally be the case. That means bonds that mature in the shorter term and bonds that are higher quality. All sensible stuff. They are also able to mitigate risk through the use of derivatives, this is called hedging; it means that an investment is made that does well if another investment, or group of investments, falls in price. These hedges can be quickly removed if required.

The equity fund managers are, very importantly, sticking to their long term investment approaches. We invest the funds for the long term, 5 years or more, and seek to look through short term market moves; but they do provide opportunity and we are active managers. Many of the fund managers have reduced some of the weightings to companies that are more sensitive to weakening economic conditions and rising inflation and interest rates; again, all sensible stuff.

In the funds that invest across different asset classes, we have adopted similar approaches, in essence; strong risk management.

Answers for the barbeque crew

The economic outlook is not good. Financial markets have clear risks at present. Your fund managers can mitigate those risks, but they are real. The longer term outlook is better, asset prices will rise, but it could be from lower levels than today’s.

Away from the economics; some good news

The prices of most asset classes have been driven by the economic data and outlook, (often called macro factors) including; bonds, equities, real estate, even Bitcoin. Commodity prices such as oil, gas, metals and agriculture have been more subject to demand and supply; as these are more specific to each commodity, they are more micro factors, although it’s clear that the macro is at play here as well.

One micro factor that has been more encouraging than was expected has been company profitability. In the US, companies report their profits and provide guidance on the outlook every 3 months, in what is known as the “corporate earnings season”. It is similar in other regions, although not all report quarterly and the US is a focus because of all the large, well-known companies there.

Encouragingly, in aggregate, companies (in the US and elsewhere) reported better profits than the worst expectations, including mine, for the second quarter of the year. More encouragingly, their comments for the rest of the year were not as bad as expected. Of course, it’s possible they are wrong, but it is not in their interests to mislead the markets.

But, macro influences have overridden the micro and share prices are being driven by the more negative influences.

The last word (or what will the barbeque crew be talking about this time next year?)

Since the Brexit referendum, it seems that the topics of conversation have been; well, Brexit, UK politics, US politics, COVID, Ukraine and the cost of living crisis. None of these are much fun to discuss.

They will all wax and wane to one degree or another. But we should not forget, that we will reach a point where politics is low on the agenda, COVID is further in retreat, Brexit is a memory and inflation and interest rates are falling. In fact, the last two of those should come about next year, COVID is much less impactful today and I, for one, am trying very hard not to use the B word.

So maybe it can be the darkest before dawn, no pun intended should there be power cuts this winter.

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Risks

All types of investment carry a degree of risk.  It is possible you could lose some, or all, of the money you invest. The level of risk varies depending on the type of investment.

Reference to any particular investment or asset class does not constitute a recommendation to buy or sell the investment or asset class.

Equities (shares) can experience high levels of price fluctuation.

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.

Higher inflation can lead to some investments falling in value, particularly those with a fixed level of interest, for example government bonds and corporate bonds.

A hedge is designed to offset the risk of another investment falling in price. It can also act as a limit on potential gains if the investment that has been hedged increases in value.

Property values can rise and fall sharply depending on the strength of a country’s economy.

A derivative is a contract whose value is based on the change in price of a specific asset or index. When derivatives are used within a fund, it doesn’t necessarily increase risk. However, price changes in the underlying asset can translate into big swings in the value of derivatives (up and down), which has a direct effect on the value of the fund.

Future forecasts are not reliable indictors of future returns.

Glossary

Asset class

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.

Capital

Describes financial assets, particularly cash, or other assets, such as shares, owned by a person or organisation.

Commodities

These are natural resources such as gold, oil, gas, metals or agricultural products that have practical uses and can be bought and sold on financial markets.

Derivative

A financial contract whose value is based on the change in price of a specific asset or index.

Duration

A measure of the price sensitivity of a fixed income investment to a change in interest rates.

Equities

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

Hedge

An investment which aims to mitigate the effect of adverse price movements in an asset or group of assets

Macroeconomic

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.

Maturity

The set date on which a bond or similar loan will be repaid by the borrower.

IMPORTANT INFORMATION:

The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the content of this document, please speak to a financial adviser. The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.

Whilst every effort has been made to ensure the accuracy of the information in this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, we may monitor and record calls for training and quality-assurance purposes.

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227.  Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

007483/020922

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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