By Tim Wishart
The current outlook for investors is particularly cloudy, thanks to a range of global macroeconomic, market and corporate factors.
Adding to this unpredictable environment is the inescapable fact that we have never really been here before.
The Covid-19 pandemic, the government response and the various stimulus measures of the last few years have ensured previous historical episodes are at best imperfect, and, at worst, pointless guides.
I have always believed that a wealth manager’s role is to take the most extreme negative and positive outcomes on a range of key factors and weigh up a sensible balance of probabilities.
This helps us to shape our asset allocations and allows us to invest with conviction in specific investments and themes.
So, what are the key factors for investors to consider today? We think there are four key things to consider for any investor out there
who is not sure what to do in the current environment.
In periods of economic strength, investment portfolios typically make positive returns. The weakness in asset markets this year reflects the fact expectations for the economy have broadly deteriorated. It is too early to say with confidence exactly where the economy will go next, but economic growth has essentially stalled, so investors should be considering assets that
are either priced to allow for an excessively negative outcome, or can deliver growth in
an uncertain environment.
To understand the prospect of economic growth, we must try to forecast what will
happen to inflation, as this is currently the pre-eminent driver of consumer spending and corporate confidence.
On the negative side, we are yet to go through the worst of the inflationary crisis in the UK.
The Bank of England has forecast inflation will possibly hit 13 per cent later this year, driven mainly by rising energy and gas prices.
While the UK’s cost-of-living crisis is worse than that being experienced in most places around the world, the general trend of attempting to moderate inflation can be observed across
the globe.
Most importantly, we are starting to see evidence of this in the US economy, where petrol prices have begun to reduce the inflationary problem. However, the unanswerable questions at this time are: how fast will inflation fall; and to what level will it sink?
Over the last few years, central banks have failed to accurately forecast inflation. They also failed to recognise the impact their stimulative efforts had when mixed with government giveaways during the pandemic and a number of difficult years for global supply chains.
They are now attempting to catch up, with the largest rate increases seen for decades in the major developed economies. There is a real attendant danger central banks will go too far
at a time when the economy is in danger
of a massive slowdown.
Asset markets have become too blase in the last few months about the potential risks of significantly higher rates in the period ahead. Investors should be careful about holding too great an exposure to assets with significant interest rate risk, such as government bonds.
Amidst all this uncertainty, how are companies faring? Recent results have been
a mixed bag, but firms have defied the gloomiest of expectations and are relatively sanguine
about their prospects.
This has been a mighty spur behind the recent recovery in global asset prices and propelled equity markets from an oversold situation at the end of June, to a more neutral footing now.
So, what does this all mean? The recent
market volatility is here to stay for the coming months and investors may consider minimising risk in their portfolios for the time being to ride out this storm.
While we are expecting inflation to moderate next year, the questions of when and by how much are still extremely uncertain, and it is difficult to predict what the central banks might do next. Our hope is inflationary pressures subside rapidly, and central bankers do not
have to push interest rates too much higher, although with so many different variables at play, we cannot know how things will play out.
The best course of action for canny investors in this uncertain world is to seek out attractive assets at sensible valuations, hopefully benefiting from long-run trends that can survive this turbulent year and flourish in the future.
Tim Wishart is head of Scotland and the north
of England at Punter Southall Wealth.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereLast Updated:
Report this comment Cancel