Market commentary: 1 April 2023 – 30 June 2023

Jul 13, 2023

The last quarter was dominated by inflation and central banks’ response to it (higher interest rates). 

As for interest rates, we wrote the following in December 2021: 

“On the evidence that we have today, it is no longer a question of if the Fed will be behind the curve when it comes to combating inflation. It is already clear that the Fed is too late and that this is deliberate. Not only is inflation no longer transitory, it is no longer within the Fed or the Bank of England’s (BoE) control. Their credibility when it comes to their ability to predict and control inflation has been fatally undermined and investors should place no confidence in their statements”.

 Shortly after this the BoE started incrementally raising interest rates culminating, 18 months later, in a further 0.5% rise on 22nd June to take base rates to 5.0%. Inflation has remained stubbornly high: in double digits for seven months in a row before moderating to 8.7%. The reason for the perceived need to raise interest rates in June was because the BoE has been guiding expectations towards inflation declining towards the 2.0% target within two years. The June figure meant markets lost confidence in this prediction and gilt yields rose sharply.

 Andrew Bailey, the BoE Governor, said on the day that: “Inflation is still too high and we’ve got to deal with it. Second round effects in domestic price and wage developments generated by external cost shocks are likely to take longer to unwind than they did to emerge”. The first part we agree with, the second part not so much.

 The BoE failed to understand that these inflationary forces were the direct result of policy decisions it made (with some help from the Treasury). It was the BoE that stoked inflation by printing money and manipulating base rates to near zero for over a decade. It was this failure that led to the price of gilts falling, that has led to soaring interest rates, that has seeded the coming crash in house prices and will soon tip the UK into recession. 

 The Governor’s comments reveal that there remains no acceptance or even recognition of a series of compounding errors; that its actions were inflationary and that this inflation would not be transitory. If we were to hazard a guess, the next misstep the BoE will make will be in keeping interest rates high when a deflationary recession will be ridding the system of inflationary forces. 

 The consequences for the UK economy of these errors will be painful. 

 Over 80% of the UK has 1-5 year fixed rate mortgages, so there is a lag in the impact of higher interest rates. Some households will have already had to remortgage and feel a sharp increase in monthly payments. This impact is increasing. According to the Centre for Economics and Business Research (CEBR), 2.4m mortgage holders or 16% of mortgages will be up for renewal by the end of this year. Many of these will have secured rates of 1.5%, or below, that are now expiring. With mortgage rates today likely over 6% those affected will see their monthly payments quadrupling (if they are interest only). Buy to let owners will face other remortgaging issues. 


 Asset prices have not been volatile over the last quarter. The winners were equities – driven by the US equity market again after a dire 2022. Gold has had a strong year but drifted lower over the last quarter. Property has been weak over the year and is declining more rapidly over the last month – we sold our last property assets in January. Oil has seen its price fade despite the ongoing war in Ukraine and OPEC’s attempts to throttle back supply. Longer duration gilts have been weak reflecting the higher yields and interest rates. 

 Overall though the prices of assets have been less volatile than the economic and news cycle might suggest. 

 Our concerns over the vulnerability of property prices are revealed in the fact that our exposure is zero. We also have concerns with the narrowness of the leadership in US equities – it is again the same cohort of tech giants that are leading the S&P 500 upwards, having led it downwards in 2022. The largest 7 tech companies (Apple, Microsoft, NVIDIA, Amazon, Meta, Tesla and Alphabet) were responsible for 11% of the 14% that the S&P 500 rose over the course of 2023. Such narrow leadership is most usually an indicator of retail speculation and investors should be wary of the signals. Company earnings have declined by 10% over the last two quarters and it remains difficult to reconcile high valuations and rising prices with a deteriorating economic backdrop and company earnings. 

 We have been able to secure modestly positive returns for our clients and avoid most of the bear-traps in markets, which is pleasing, but we continue to counsel defensiveness and caution in asset class selection and choice of underlying investment.