April Investment Update

March’s banking system wobbles started to abate in April. It isn’t that the issue is solved yet, but that it looks limited to poorly managed, regional US banks, and as we expected, policymakers quickly stepped in to ensure stability in the system.

To counter that we had more challenging inflation numbers to contend with, especially in the UK, with the annual rate falling from 10.4% to 10.1%. That was a chunk short of the figure markets expected, which started with a 9, the excess driven mainly by food price inflation which hit its highest level on record.

We remain optimistic that inflation will fall rapidly over the coming months though. The monthly inflation rate in April 2022 was 2.5% (for one month), so even if we have a higher than expected monthly number this April, of say 0.5%, we would then see 2% cut from the annual rate once the next release comes out on 24^th May.

Moreover, we have energy prices which are expected to fall 20% below the energy price cap for the second half of 2023, as well as another huge inflation month in October (the point at which energy shot up last year) which will fall out of the numbers. We would expect the annual rate to be comfortably below 5% when we get to October.

Overall, the portfolios performed solidly in April, adding between 0.44% and 0.76% depending on the risk profile selected. Year-to-date returns sit between 1.52% (Very Low Risk) and 4.66% (High Risk), in what have been strong returns relative to our industry risk benchmarks, as demonstrated by the chart below:

It is important to re-emphasise that we remain positive on the overall market outlook. We expect economies to remain resilient across the rest of 2023, inflation to fall quickly, and company results to be better than expected. The latter has started to happen in recent weeks, with Microsoft, Google and Amazon to name but a few reporting strong results and seeing their share prices rise.

At the same time the portfolios will continue to benefit from a strong level of income being generated, which trickles in at between 0.3% (High Risk) and 0.5% (Low Risk) per month.

That said, we don’t expect markets to move in a straight line and in fact see a significant possibility of some volatility over the next 6 weeks. The key challenge here is the US debt ceiling, which is likely to become a political football between the Republicans and Democrats, as they jostle for position ahead of next years election. We do ultimately expect a deal to be done, but we could well see newsflow showing parts of government shutting down such as was the case in 2011. If there is anything Brexit has taught us it is that negotiations often go down to the wire.

We have therefore made the decision to position the portfolios more defensively ahead of time, reducing equity risk significantly and building our cash holdings to between 6% and 8% across the range. This is just as much about protecting capital in the short term, as it is about giving us the opportunity to take advantage if there is some short term volatility.

Once the debt ceiling is resolved, we expect a more favourable investment environment to reappear, driven by improving inflation across the summer and the corresponding pause in interest rate increases. In the meantime, we remain vigilant and aware of the risks, and focused on continuing to drive consistent returns from income.