A Year of Two Halves

The predictions of falling inflation, and in due course interest rates, still hold good for
later in the year which should lead to a positive change in sentiment
and, we expect, an increase in market values. However, in the short
term values have been hit by two factors; the decision by OPEC to
reduce the production of oil and the troubles with a small number
of banks. OPEC appear to have been disappointed by the falling
oil price and the impact it was having on their revenues, so they
have decided to restrict the amount of oil they produce and this has
pushed the price up by about 5% – the laws of supply and demand still
hold true! Although great news for their bank balances it is clearly
not what we, as consumers, wanted as this will keep the price of fuel
(and anything that is transported anywhere) higher for longer. This
is delaying the expected fall in inflation but do be assured it is only a
delay and that the medium term outlook remains very positive for a
fall in inflation.

Overexposure to crypto currencies and tech businesses.

The media loves a “crisis” and the troubles with three small to
medium sized American Banks hardly fall into this category. Since
2008 all banks have been encouraged by their respective regulators
to ensure they maintain a strong capital reserve position and the
three American banks failed due to a combination of overexposure to
crypto currencies and technology businesses. This hardly falls into the
definition of “mainstream retail banking” and as such did not cause
us any great worries despite the best efforts of the tabloid headline writers! Their failure did however coincide with the final demise of
Credit Suisse as it was taken over by UBS, Credit Suisse is a name
we have known for many years but what is less well known is that it
has lurched from one struggle/fiasco to another over many years.
Its takeover had been predicted for years and was, in reality only a
matter of time so again not really a “crisis”.

Considering interest rate position carefully

The upside of the publicised troubles with these banks is that it has
encouraged Central Banks to be cautious in their desire to raise
interest rates much further. With inflation sticking and the actions of
OPEC keeping it from falling as quickly as hoped there was a feeling
Central Banks would like to raise interest rates further and faster. However, with the
failure of the three American Banks it would appear that Central Banks are considering
the interest rate position much more carefully. The last thing they want to do is
engineer a true banking crisis by forcing Banks into much more expensive payments for
their own loans, never mind forcing the private borrower into higher repayments.

Interesting markets.

When attempting to look at the forthcoming quarter there is an element of “sitting
outside the headmaster’s office” at the moment. Falling inflation and interest rates with
the subsequent change in sentiment and rise in investment values may well be calling
out to us saying “let me be your fantasy” but in the last few weeks markets haven’t
been interested. We do definitely see however, fundamental signs that these “fantasy”
desires will come true. We just have to be patient and wait for the fundamentals to
improve. The investment managers are suggesting that there is value in both share and
Government Bond markets at the moment with solid, profitable companies currently
undervalued and expected to increase in value and the expectation that the medium
term trend for interest rates is definitely downwards which should lead to a rise in Bond
prices. The only potential fly in the ointment is the likely increase in military activity in Ukraine as the weather improves. No-one knows how this
conflict will end and as we know the Russian position is more than
unpredictable; time has a habit of “normalising” events originally
considered shocking but an increase in hostilities will have a short
term negative impact on values.

In the investment world we know that returns in 2022 were
below par and the expectation continues that overall, 2023 will
be a better year. There was always however an anticipation that
2023 would turn out to be a year of two halves with a less certain
and more volatile first six months followed by a more settled and
productive second six months. So far, this particular prediction
is proving to be accurate but time is passing and without wishing
to sound like a stuck record we do see prospects for plenty of
improvement in the coming months.

This article is the opinion of David Wheildon