July Investment Update

Someone asked me last week “what’s the most important lesson you’ve learnt across the last 5 years?” Well, that’s tough as a  lot has happened, as covered in our recent blog ‘A Unique 5 Year Period draws to an end‘ . To be honest I thought it would be a harder question to answer, though actually the answer came to me pretty easily, and I replied, “to try to think long term when everyone else is thinking about the short-term”.

In life as well as investing, avoiding short term noise is easier said than done. Society is often focused on giving us an immediate dopamine hit, so we are constantly wired to think about the next experience or event. Markets are no different. They spend most of their effort trying to predict the next interest rate hike and inflation number, which often leads to an overreaction. When that happens, investment markets tend to fluctuate one way or another, worried about an issue which in the grand scheme of things is either irrelevant, or unlikely to detract from the bigger picture. Whilst these moments of ‘irrational behaviour’ are temporary, they often create fear and price falls, which ultimately improves the longer term opportunity.

The good news is that UK inflation, which has been a key source of market worry in recent months, came in below consensus at 0.1% for the month of June. We have always felt the inflation challenge is due to temporary factors and didn’t feel the significant shift out in interest rate expectations was justified. The better-than-expected number for June calmed investors and allowed bond prices to stabilise. At the same time global equity markets had a positive month, led by further economic data which continues to suggest a recession isn’t imminent.

Adding those things together and it was a good month for the portfolios, as they returned between 1.29% (Very Low Risk) and 2.42% (High Risk). It was also pleasing to see further outperformance vs benchmarks, with some strong differentials showing now year-to-date.

It’s important to emphasise that although it is great to see our base case on UK bonds start to play out, it is not really the key aspect of the opportunity. We can make another plausible argument that July’s inflation number will once again be positive, but it really misses the bigger picture.

Our UK bond portfolio now provides 7-8% annual income into our portfolios for the first time in over 15 years, so if inflation even gets back close to 3%, they are going to provide significant inflation-adjusted returns for a number of years ahead.  Similarly, equities will struggle if a recession starts to look more likely, though valuations in a lot of the areas we are invested are better than they have ever been. Not every month will be like July of course, but it doesn’t need to be, for returns to be strong.