May Performance Update

The phrase “all-time highs” usually comes with some associated caution. It means a certain investment asset has never been higher in price, and therefore feels a little like you are in unchartered territory. “If this is the highest it has ever been, surely it will fall in price soon?”

History has shown that this is not a good way to look at things, and that’s because markets generally go up over the long term. This is due to progress made through investment that hopefully leads to positive change. As companies progress, their valuations should rise. This is often countered by economic cycles or geopolitical events, though over time these blips should provide opportunity to investors, assuming of course they have the timeline to remain invested.

Many markets have made ‘all-time highs’ this year, led by US markets which passed their previous 2021 high in January (following a significant inflation correction on the back of Covid, which was some blip!)  More recently the UK’s FTSE 100 index completed the same feat, moving through 8,000 to reach a new recent peak of 8,450. It doesn’t just relate to equity markets either, as our portfolios reached their own high points in recent weeks, again now sitting above the previous best from 2021:

This was in part thanks to May’s performance, with the portfolios adding between 1.3% (Very Low) and 2.4% (High) depending on the risk profile. UK inflation fell to 2.3% (slightly above the 2.1% that was expected) and economic growth data continues to suggest things are ok. There is still a bit of volatility in the interest rate and inflation outlook, with forecasts changing (on economic data) frequently. An example is that at the start of the year interest rates were expected to be cut five times, whereas at the moment markets are only pricing in one or two cuts over the next 12 months.

Overall, we would say current markets and forecasts continue to be supportive of returns. The Prime Minister must agree with us, feeling that things look good enough to risk an early election, which will take place on the 4^th July (election special to be in your inbox before this date). Unless he is pinning all his hopes on England winning the Euro’s and the feel-good factor getting him over the line (that would be some risk!), it looks like a challenge!

The only certainty we have is that time waits for no one, and over time progress eventually leads to positive market outcomes.  In many ways, what is more interesting is how the current environment compares to the previous high point in 2021. At that time interest rates were on the floor, meaning the income yield on offer from investment assets was low (1-3%), and equities had been on a quite meteoric rise from the bottom of Covid. Today it is very different as we know, with interest rates in excess of 5% and equities having been through a very mixed couple of years. On a price to earnings basis (a commonly used measure of valuation), equities are actually 17% cheaper than they were at the same point in 2021. Bonds are cheaper still, in some cases by 40% or more with income yields that are 3-4% higher.

The difference in forward opportunity set is marked. In 2021 I remember us sitting down as an investment team and discussing how it was hard to see where the next 2-3% would come from. Right now, we get 4-6% in income alone, so it is a very different feeling today. It won’t happen in a straight line, but all-time highs are a normal part of the journey and there are many reasons to think there will be plenty more ahead.

Our next blog on the 14^th June will be a ‘Question the Committee’ special where we invite you to pose a question to our Investment Team. It can be on anything from interest rates to the upcoming election, all we ask is that you keep it investment related.

Please email us at questions@dbwood.co.uk by Sunday 9^th June.

We look forward to hearing from you!