Written By Marcus Rayer
Where historically we have seen quieter periods in financial markets over summer, this has not been the case so far in 2023. In fact, the year has continued to remain stronger than expected in some regards, having not seen the five-quarter-long economic downturn that the Bank of England once predicted. Nor have we seen the anticipated strain on supply chains associated with the war in Ukraine leaving Europe short on supplies of natural gas. This is due – in part at least – to flat economic activity supporting labour markets.
Inflation continues to be a key focus for the government to bring down amidst the cost-of-living crisis. At the time of writing this update, the Bank of England once again raised the base rate to record highs – this time to 5.25% – in order to tackle inflation, however, this still brings challenges to many savers and mortgage holders.
Although higher interest rates are a weight on economic activity, historically it has been rising unemployment that has delivered more severe downturns, especially in housing markets as homeowners are deprived of the income to service mortgages. In this regard, worker shortages can be attributed to a number of factors, including Brexit, immigration laws and a swathe of early retirements, or long-term illnesses following the Covid-19 pandemic.
As a result, there is some evidence that companies are hoarding labour, having experienced the pain of having to rehire following the pandemic. This is supportive of consumption and the housing market, but not exactly beneficial to economic productivity. A direct result of this is the Bank of England continuing to tighten policy, as any sort of wage/price spiral is seen as enemy number one in the fight against expectations of higher inflation becoming entrenched.
The wide expectation remains that interest rates will peak in 2023. With the majority of commentators having widely underestimated the resilience of economic activity, we have continued to recommend a cautious level of optimism and that investors should retain some exposure to equity markets within their portfolio.
The continued willingness of buyers to invest in somewhat expensive equities has helped to prove this point thus far. However, we would stress that having a more global approach to equity markets is the sensible way forward, as there may be much better value on offer. We are also seeing investment houses being more comfortable owning sovereign fixed-income assets as risk diversifiers within a portfolio, given their higher yields at this current time.
Some lingering scepticism remains regarding the sustainability of equity market gains, but should inflation continue to fall, a sense of improving economic stability should help to buoy the markets. Therefore, retaining a constructive view on risk assets, during the rest of this year and early into 2024, is currently a popular stance for many clients.
If you wish to discuss your investment opportunities at this time or have any questions regarding this update, please do not hesitate to get in touch with your Integrity365 adviser.
Please note: If you have any concerns regarding your mortgage rates or renewals, we work closely with the adviser team at Gladstonei365 Mortgage Brokers who we can gladly introduce you to.
Written By Marcus Rayer
