When I last sent one of these communications on 22nd September, I ended with the following, “Things will improve when inflation appears to be coming under a degree of control and if/when there is some kind of resolution in Ukraine; I do hope to be able to write with more positive news soon.” This was of course, before Kwasi Kwarteng’s so-called ‘Mini-Budget’, which has spooked the currency market, the UK Gilt market and, to some extent the UK equity market. As a result, I do not have any good news to report just yet, but I do want to provide some context which I hope might settle some nerves.
I don’t want to get into the politics of announcing the removal of the 45p tax rate at a time of hardship for many (it’s not now happening of course) but it does seem that this is the aspect of ‘Mini-budget’ that the media and opposition parties have latched on to. The inference in the media has been that it was this announcement that caused the pound to crash and the Gilt market to go into freefall – it wasn’t! Out of a total package of tax cuts announced amounting to some £40 billion, the loss to the exchequer from repealing the 45p rate would have only been about £2 billion (5% of the total) and it could have led to higher tax receipts as the wealthy lose the incentive to find convoluted ways to avoid it. No, the markets (unlike the media) responded to the important bit, the other £38 billion of cuts and how they were to be funded - through borrowing! When Kwarteng publishes the Fiscal Plan, now at the end of October and not 23rd November (thankfully), the markets might settle down a little, until then the markets are staring into the dark, unsure of the impact on the financial stability of the UK, further volatility can therefore be expected.
So, where is the context that might settle clients’ nerves? Well, Clearwater portfolios (constructed and managed by EBI) are not just invested in the UK Gilt and Stock markets; the geographical spread (top 10 countries) of our most popular portfolio Vantage Earth 60, is currently as follows:
United States (US) 50.68%
United Kingdom (GB) 6.98%
Japan (JP) 6.58%
Germany (DE) 4.90%
France (FR) 3.43%
Canada (CA) 3.22%
China (CN) 2.37%
Switzerland (CH) 2.26%
Australia (AU) 2.18%
Italy (IT) 1.43%
The gyrations in the UK are certainly having an impact on the performance of our portfolios but it is what is happening in the wider world that is much more important, the global fight against inflation and the war in Ukraine.
If there is a silver lining to the clouds around us, it is actually in the weakness of the pound relative to the dollar because of the weighting we have in the US. The following chart shows how far the S&P 500 has fallen since the beginning of the year in Dollar terms:
As you can see, a fall of 23.76% since the start of the year! This second chart shows the same index but in Sterling terms:
We still see a substantial fall of -6.85% but the pounds weakness has provided a welcome hedge against the worst of the falls. It is important to understand that a significant strengthening of the pound would unwind this position but let’s hope that any such strengthening accompanies a recovery in the US stock market.
In terms of fixed interest exposure, only 11.36% is in the UK and only some of this is invested in UK Gilts which have been hit so hard by recent events. The following chart compares the performance of our Bonds vs the UK Gilt Market as a whole, since the beginning of the year:
What the charts above demonstrate is the benefit of diversification. Investments across multiple countries and multiple sectors ensures that we are never going to be at the bottom of the pile when shockwaves are felt, unfortunately it does not mean our portfolios can buck global trends. The battle against global inflation and the war in Ukraine will continue to cause substantial volatility in markets but this volatility comes hand-in-glove with long-term investing.
One last chart to provide more context – this one shows portfolio Vantage Earth 60 (simulated returns) over the past 20 years.
When we look back over many years we can see plenty of incidences of extreme volatility BUT we got through it in the end! While writing to one of my clients this week, I was reminded of Boris Johnsons’ tribute to the late Queen, he referred to her broadcast to the children of the nation during World War II, age 14, during which she offered these encouraging words; “We know, every one of us, that in the end all will be well.” I think that attitude of optimism is the best way to get through each day whilst markets are gyrating all over the place, we will come through it ……. eventually.
I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.
With kind regards,
Yours sincerely
Graham Ponting CFP Chartered FCSI
Managing Partner
