Gower Pension Schemes, Member Briefing - December 2022

Following the drama and volatility felt across markets throughout much of the year, medium to long-term pension investors are likely best served by ignoring the near-term trauma of it all.

I appreciate this is a tough task. Numerous challenges have faced markets at home and abroad with the most recent tragic - arguably comedic period - for British politics occurring in September and October. This was due in no small part to the Truss/Kwarteng mini-Budget which had good intentions at heart but whose communication was amateurishly delivered. The comedy was very much of the dark variety given the adverse market reaction with its knock-on effects on the British Pound and pension funds alike.  

But, if you are confident that your retirement investment mandate reflects your risk tolerance and investment aims, you should take some comfort from this. Attempting to manage market volatility or eliminate risk or loss from your pension investments will prove futile. This can be evidenced by those who held UK Government bonds or ‘Gilt-edged’ securities which had previously proved to be a byword for safety until they were down by 30% as recently as October. Short-term reactions may even magnify the downside effects by locking-in losses and inhibiting the future growth potential of your pension investments.

Amongst the geo-politics and gyrating markets, elements of the Crypto universe underwent wholesale collapse in the form of FTX, a leading cryptocurrency exchange based in the Bahamas. I suspect there will be broader contagion within this sector and further casualties to come. Fortunately, it is the former type of financial markets that matter to mainstream pension savers. There is no comfort in the grim realisation that some Crypto investors will have sustained significant losses in this unregulated, ‘buyer beware’ sector.

Just as the Pound rebounded strongly once the Truss/Kwarteng mini-Budget was unwound, similar reversals have featured across markets through the current Quarter and there is much to be positive about. Equities have rallied across many sectors, easing some of the losses sustained through the first 9 months of the year. UK Gilts have likewise partially recovered following the alarming sell-off in the aftermath of the mini-Budget.

Whilst this may offer comfort, the singular most important interest rate in the UK - the Bank of England Base Rate - shows no signs of easing any time soon; if anything, quite the contrary. The Bank of England is very much focused on an aggressive strategy of rate rises and have communicated there will be no adjustment in this undertaking until a clear sign is seen of inflationary pressures easing. Economic growth and employment are obvious casualties of this strong medicine approach.

The reason for the sustained rate hikes we are undergoing is of course to tame escalating price pressures. The return of inflation has been spoken of frequently within these briefings in the past. The purpose was to signal the threat it posed and highlight that prior inaction from central banks would lead to a reversal in their complacent approach. The current position has of course been made worse by the continuing war in Ukraine.  We are therefore now witnessing a ‘catch-up’ strategy and of course no mention is made of the ‘transitory inflation’ previously endorsed by the government and Bank of England alike.

Monetary policy adopted for many years prior to the Covid Pandemic was then extended and accelerated to help support workers and the broader economy. This was always going to be inflationary given that the government bypassed the banking system and applied aid directly to consumers and corporates alike. Continued supply chain disruption, a European War and the UK’s balance of trade position have served to make for an extremely challenging period for inflation which is back at levels not seen in 40 years.

The topic of recession is also now frequently raised. I feel we can learn much from the initial attitude adopted towards inflation in this regard. Where the latter was concerned, the prior consensus was generally, “yes, we have inflation, but it is transitory”. The current consensus runs that “yes, we have recessionary pressures, but any retrenchment be short and shallow”. Time will tell if this parallel proves to be pertinent.

I believe we should be cautious regarding this ‘recessionary’ groupthink given the challenges ahead, but should also allow some room for some much-needed optimism as we approach 2023.

It may seem puzzling at times but whatever market conditions prevail, scheme members can be confident that well managed pension investment within well-regulated financial markets remains the most reliable and successful way in which to build their retirement wealth. 

I close by wishing all Pension Scheme Members the compliments of the season.