Moving through periods of volatility

We have certainly seen this from our Labour Government with dramatic proposed changes in the Budget relating to the Inheritance Tax regime surrounding pensions and agricultural land together with an increase in employers’ National Insurance from April this year. Already Donald Trump is, as predicted, making a great deal of noise and this is likely to continue throughout his Presidency. Although very different in their philosophies, our Government and Mr Trump are having the same effect on volatility and I suggest the recent increase in this is likely to be with us for the foreseeable future. With the added (but hopefully easing) concerns over the geopolitical situation in the Middle East we must all anticipate a bumpy ride over the coming months.

Volatility is here to stay

It is still fair to say that the global economy is heavily influenced by the speed of growth in the Chinese and American economies. The Chinese economy continues to recover from its mishandling of the Covid pandemic and in parts there are attractive investment opportunities,
particularly in advanced manufacturing of, for example, electric vehicles. President Trump has made no secret of his pro-business stance which should stimulate growth and benefit your investments in the USA with a wider spread of positive returns as opposed to those primarily focused around the major technology companies. Although this will, in principle be good news for investment returns, it does raise the spectre of increasing inflation, usually followed by increasing interest rates which would not be good for markets As mentioned above; volatility is here to stay. President Trump is clearly focused on “America first” and there is concern over the introduction of severe tariffs on goods imported from overseas but even these could present opportunities elsewhere such as Europe and indeed here in the UK.

Europe has its own struggles with the German economy facing high energy costs and increased competition from the Far East; France also has political instability to deal with. Against this background however it is thought the European Central Bank will lower interest rates later this year which will benefit the Bond markets and hopefully the wider European economy and if tariffs to the USA are put in place it will drive companies to seek out new markets, ideally on their own continents.

Mixed messages over the coming months

Looking closer to home it is likely to be a year of two halves in the UK with the first 6 months being more difficult. In recent weeks markets have been disturbed by the economic changes put forward in the Budget. Further the impact of the employers’ National Insurance rise will need to be digested not only by employers themselves but also by consumers who will face higher prices imposed by the employers looking to cover their increased National Insurance costs. We do feel it will be mixed messages over the coming months, hence the increased volatility, however we are confident that in the medium term the drive to keep inflation round the 2% target will succeed and that interest rates will continue to fall. It may well however, take longer to reach these goals than was thought 12-18 months ago particularly if inflation in America picks up.

Fixed Interest may do well this year

The area that may do well this year is Fixed Interest such as UK gilts, Eurobonds and in America, Treasury Bonds. Traditionally these sectors do well when interest rates fall and can also be seen as a safe haven in more difficult times. There are ways of accessing returns from this sector without simply lending moneys to Central Goverments such as infrastructure funds and it is these wider options that your fund managers will be making use of this year as well as the more traditional, shares, property, debt and cash holdings. In the UK the Government is keen to progress infrastructure plans (not mentioning HS2) and businesses involved in any forms of increased infrastructure funding or spending will benefit. This is likely to be a common theme across many of the major developed economies.

Hold on to your hats

In summary therefore, we are not expecting a ride as wild as would be experienced with snakes on a plane but at times there may well be an element of “hold on to your hats” as we move through periods of volatility. We are confident that we will all come through the year having made some decent returns provided we remember that successful investment is a medium term game and should not be derailed by over-reactions to short term problems. We will continue to monitor the activities of your fund managers very closely to ensure that they balance their medium term strategies against short term volatility to ensure there is not an excessive amount of concern at any time.

This article is the opinion of David Wheildon