April Showers

Since the end of 2022 we have had a positive outlook on investment markets. That was the point of peak fear when inflation had just hit 10% and interest rates were quickly being increased. All markets were struggling to adjust, though we also expected that as those variables came more under control, investors would regain confidence.

The most significant hurdle was the last interest rate increase, which we now know to be August 2023. Then, as inflation kept falling, attention shifted to when Central Banks might cut interest rates, fuelling a recovery in asset prices. The fourth quarter of last year and first of this were therefore very positive, with the portfolio range returning between 7.91% (Very Low) and 13.47% (High) in just six months from 1^st October 23 to 31^st March 24.

The rally in that period (like most rallies) got ahead of itself a little, especially given that whilst not shooting the lights out, economies were not slowing under the strain of higher inflation and higher debt costs. In the main, corporate profitability remains good, and wage increases are running between 4% and 5% per annum into 2024, well ahead of the current annualised inflation rate. In addition, although most of Europe have already been through a very mild, technical recession, there are early signs that growth is starting to pick back up. Inflation in Europe has been between 2% and 3% consistently since September, with the UK also due to join that club this month when we get the April inflation release, in turn supporting consumers. The only real stumbling block on the inflation front is the US, who are struggling to get it below 3.5%. Again this has caused investors to worry that interest rates may not be able to be reduced for some time.

Due to that economic resilience and slightly sticky US inflation, the number of interest rate cuts that were expected in 2024 have been reduced significantly by markets, and as such we have seen a slight pull back in valuations in April of between 0.6% and 0.8% (depending on the risk taken). On the positive, that pull back has increased the portfolios’ income yield, so we will have slightly more coming into portfolios from May than we had at the start of the year, whilst also delivering positive performance over that time frame.

So, April has been a month to pause and reflect on where inflation and interest rates are likely to be at the end of the year. Markets are now only pricing in one cut on both sides of the Atlantic, so there is room for a positive surprise once again and an uptick in capital growth. We have always expected Central Banks to be cautious when it comes to reducing interest rates, and having a slightly stickier inflation picture will mean they do just that. ‘Higher for longer’ is the market narrative, which other than these short-term wobbles, is generally a good thing because it means the income people get from their savings and investments is also higher for longer.

It sounds a bit cliché, but markets will never go up in a straight line. This current pause is healthy and nothing that we wouldn’t expect given inflation looks slightly harder to eliminate in the US in particular. The bigger picture very much remains in place, in that much of the heavy lifting with getting inflation down is complete, and interest rates have peaked. The longer they are kept higher, the longer the portfolios will receive 5-7% per annum in income. That income has really helped underpin the returns delivered in the last 12 months and we expect it to continue to drive returns over the next. In the meantime, we have used April to add to our convictions, and we remain very active in our management to try to take advantage. Looking forward into late Spring and Summer then, we remain optimistic that we are positioned well to achieve our return objectives for the year.